STRIKING A BETTERBALANCE-- THEWORLDBANKGROUPANDEXTRACTIVEINDUSTRIES: THEFINALREPORTOFTHEEXTRACTIVE INDUSTRIESREVIEW WORLDBANKGROUPMANAGEMENTRESPONSE SEPTEMBER 17,2004 WORLD BANKGROUP MANAGEMENTRESPONSETO THE EXTRACTIVE INDUSTRIES REVIEW CONTENTS hBREVIAT1ONSAND ACRONYMS ................................................................................................... .. 11 EXECUTIVE SUMMARY ................................................................................................................... ... 111 IINTRODUCTION . ............................................................................................................................ 1 I1. STRENGTHENING GOVERNANCE TRANSPARENCY ............................................................... 2 Governance and E1.............................................................................................................. 2 AND Transparency ....................................................................................................................... 4 111. ENSURING THAT THEPOORBENEFIT FROMEXTRACTIVE INDUSTRIES ...................................... 4 Reporting andMeasuring the Poverty Impactsof E1Projects............................................ Enhancing Poverty Impacts................................................................................................ 4 6 Artisanal and Small-scale Mining ...................................................................................... 6 Iv. MITIGATING ENVIRONMENTALAND SOCIAL RISK .................................................................... 7 v. PROTECTINGTHE RIGHTS PEOPLEAFFECTED E1INVESTMENTS ....................................... 7 The WBG andThe Rights ofProject Affected People....................................................... OF BY 7 Indigenous Peoples ............................................................................................................. 8 VI PROMOTINGRENEWABLEENERGY EFFICIENCY COMBAT CLIMATECHANGE.............. 9 . Climate Change andE1....................................................................................................... AND TO 9 VI1 IMPROVING .................................................................... . ORGANIZATIONALCOORDINATION 12 VI11 ONGOINGLEARN~VG . AND REVIEW ...................................................................................... 13 IX. FUTURE STRATEGY FORWBG INEXTRACTIVE INDUSTRIES ................................................... 13 X. SUMMARY ................................................................................................................................ 14 XI.SUMMARY OFCOMMITMENTSAND TIME-BOUNDACTIONS.................................................... 16 ANNEX. DETAILED MANAGEMENT RESPONSESSPECIFIC TO EIRRECOMMENDATIONS ...............17 Part I Pro-poorGovernance ............................................................................................ 17 PartI1 Environmental andSocial Components ofWBG Interventions.......................... .. 29 PartI11. HwnanRights ..................................................................................................... PartIV WBG Institutional Prionties............................................................................... 36 38 PartV Conclusion andFollow-up .. . . . ................................................................................... 44 Abbreviationsand Acronyms AAA Analytic andadvisory activities ASM Artisanal andsmall-scalemining CAO ComplianceAdvisor/Ombudsman CAS Country Assistance Strategy co2 Carbondioxide CASM Communities andsmall-scalemining CODE Committeeon DevelopmentEffectiveness DFID Department for InternationalDevelopment E1 Extractive industries EIR Extractive Industries Review EITI ExtractiveIndustriesTransparencyInitiative FY Fiscalyear (ending June 30&for the WBG) GGFR GlobalGas FlaringReduction partnership GHG Greenhousegas GFU Global Reporting Initiative HGA Host governmentagreement HIPC Heavily IndebtedPoor Country HIV/AIDS Humanimmunodeficiency virdacquired immunedeficiency syndrome IBRD InternationalBankfor ReconstructionandDevelopment ICMM InternationalCouncil on MiningandMetals IDA InternationalDevelopmentAssociation IEA InternationalEnergyAgency IFC InternationalFinanceCorporation IGA Intergovernmentagreement IMF InternationalMonetary Fund IUCN World ConservationUnion LICUS Low-income countriesunder stress MDGs MillenniumDevelopment Goals MIGA Multilateral Investment GuaranteeAgency MMSD Mining, mineralsandsustainabledevelopment NGO Nongovernmental organization OECD Organisationfor Economic Co-operation andDevelopment OED Operations EvaluationDepartment OEG Operations EvaluationGroup OEU Operational EvaluationUnit OP Operational Policy PPAH Pollution Prevention andAbatement Handbook PRSP Poverty Reduction Strategy Paper SAL Structural adjustment loan SECAL Sectoraladjustment loan SEED SoutheastEurope EnterpriseDevelopment SME Small andmediumenterprises TA Technical assistance UJV Unincorporatedjoint venture UN UnitedNations WBG World Bank Group 11 Executive Summary The World Bank Group announced in 2000 that it would conduct a comprehensive assessment o f its activities inthe extractive industries sector (oil, gas, and mining production - EI). This included, the Extractive Industries Review, an independent stakeholder consultation process headed by Dr. Emil Salim (former State Minister for Population and Environment, Indonesia). Dr. Salim's report produced a number of recommendations for the institution's future involvement inthe sector. The BankGroup hasconsidered these recommendations seriously and, in responding, has consulted with and sought to balance the often diverse views of many stakeholders including shareholder governments, civil society, and industry. What follows i s a summaryo fBankGroupmanagement's response. The Bank Group welcomes the Review. W e agree with the majority of its recommendations and we endorse its two fundamental messages: Extractive industries can contribute to sustainable development,when projects are implemented well and preserve the rights of affected people, and if the benefits they generate are well-used; and a There i s a continuing role for the Bank Group in supporting EI provided its involvement supports poverty reductionand sustainable development. We have learned a great deal from the various stakeholders ingovernment, industry, and civil society who participated in the Review. We are already in the process of implementing many of its recommendations, including initiatives on gas-flaring reduction, carbon-emissions trading, revenue transparency, help for small-scale mining operations, and increased support for biodiversity. In addition, the Bank Group continues to be a leading provider o f resources to developing countries for environmental protection, education, health, and other sectors that have linkages withthe EI. We also recognize that consumption of fossil fuels increases greenhouse gas emissions that are believed to contribute to climate change, and the Bank Group already has leveraged about $10 billion for renewable energy and energy efficiency indeveloping countries through its investments and technical support. For the Bank Group, supporting sustainable energy means assisting its partner countries inenabling them to access the most cost-effective, best-performing and reliable sustainable energy technologies that are economic, affordable, and best suited to their needs. The Extractive Industries Review has drawn further attention to the importance o f renewable energy for sustainable development and has recommended an even stronger Bank Group role. This i s fully consistent with the direction in which we are headed, and we will redouble our efforts. This is an area, however, inwhich the entire international community must act, as renewable energy currently representsonly 2 percent o fthe world's energy investments. Insummary: the Extractive Industries Review process and Dr. Salim's report have had a beneficial impact on the Bank Group's approach to the sector. Our future investments in extractive industries will be selective, with greater focus on the needs of poor people, and a stronger emphasis on good governance and on promoting 111 ... environmentally and socially sustainable development. When requested, we will also continue to advise and help governments create appropriate policy and regulatory frameworks for the sustainable development of their countries' resources. In addition, we will take major steps to increase our own support, as well as to encourage and advocate for more global support, for economically viable renewable energy and other clean fuels. Our goal is clear: to help developing countries provide their people with access to clean, affordable, and sustainable sources of energy and to ensure that extractive industries contribute to economic growth, sustainable development and poverty reduction. In many areas the Management Response is a first step in addressing complex issues where there are strong opposingviews. More detailed responsesin some areas will be spelt out in other processes such as the revision of IFC's safeguards. W e will continue to maintain a dialogue with stakeholders on the issues, to learn as we go and to refine our approach inthe light of experienceand outcomes. Our specific responses to the Review's recommendations includes prompt actions inthe following areas: Strengtheninggovernance and transparencv 0 All future Country Assistance Strategies (CAS) for resource-rich countries will systematically address relevant extractive industry issues. The sequencing of our activities in E1will be based upon governance capacity and risks. WBG and other governance indicators will help assess risk and gauge developing-country capacity. The engagement of the IMF and WBG in the country and specific country and project circumstances will help usjudge whether to support projects. Where we make judgments in favor of involvement we will disclose our rationale, and where the risks are deemed to be too great and cannot be mitigated, new investments will not be supported. For significant projects we will require risks to be mitigated. 0 In addition, the Bank Group will require revenue transparency as a condition for new investments in EI-in line with our support of the Extractive Industries Transparency Initiative. For new large projects, we will require transparency immediately to ensure that revenues are properly and transparently accounted for; for new smaller projects, we will expect it withintwo years. Ensuring that extractiveindwtrv benefits reach the poor 0 W e strongly support the principle that communities should benefit from projects that affect them. 0 W e agree with the recommendations of the Review to work with stakeholders to develop consistent indicators of the benefits of extractive industry projects on poverty reduction and use these to help identify and track project outcomes. For iv example, we are already working with the Global Reporting Initiative on this fiont. We will identify expected development impacts of E1projects we support and make these public before we recommendBoardapproval. 0 We will establish independent monitoring mechanisms in our largest projects, and encourage the development of capacity in communities to monitor projects that affect them. 0 We will work with governments, sponsors, and communities to ensure that affected communities benefit from projects as broadly as possible, including continuing to encourageandassist SME (small andmediumenterprise) linkages programs. Mitigating environmental and social risks 0 W e support the principle that due to the high value of some biodiversity resources, there are, effectively, "no-go" zones in the world for new extractive industry investments. The Bank Group's existing natural habitats policy provides a basis for identifying these areas. IFC's revision o f its safeguards will propose how to best protect biodiversity both inside and outside internationally agreedprotected areas throughits Performance Standards andImplementationGuides. 0 IFC's safeguard policies are in the process of being revised and updated to improve their clarity, accessibility, and implementation, in support of some of the specific recommendations included in the Extractive Industries Review-for example, social and environmental assessments, community participation in monitoringo fprojects, as well as other more technical safeguardsthat apply. Inaddition, we will expand disclosure of information about the impact of Bank Group's extractive industry investments and ensure prompt disclosure of relevant information to communities about projects that affect them. Protecting the rights of people affected bv extractive industrv investments W e strongly support protecting the rights of those affected by extractive industryprojects. The Bank Group will only support extractive industry projects that have the broad support of affected communities. This does not mean a veto power for individuals or any group, but means that the Bank Group will require a process o f free, prior, and informed consultation with affected communities that leads to the affected community's broad support for the project. The IBRDADA's Indigenous Peoples policy is being revised to reflect this principle, and will be discussed by the Boardo fExecutiveDirectorsinthe secondhalfo f2004. V In addition, for new projects we will implement the specific recommendation in the Review on the use of security forces to protect extractive industry project sites- inlinewiththe USAJKVoluntary Principles onSecurity andHumanRights. Promoting renewable enermand efficiencv to combat climate chanae 0 First, our strategy-through programs and policies-will aim to ensure that economically and financially viable renewable energy and energy efficiency investments become an essential element in the energy choices of our member nations, not marginal considerations. 0 Second, to ensure an institutional focus on the transition toward cleaner energy sources, we will set an initial target to increase our renewable energy and energy efficiency portfolio commitments by 20 percent annually over the next five years. This target will be reviewedon a regularbasis. 0 Third, the BankGroup standsready inthe comingmonths to convene or participate in a "steering group" of nations, academic and research institutions, civil society, and industry that can help frame a broader agenda on renewable energy (including policy reform, research, and financing). We welcome ideas and suggestionsfor this coordinating mechanism. 0 Fourth, to foster greater collaboration across national and institutionallines, the Bank Group will commit to reporting its annual performance in supporting renewable and energy efficiency programs against the figures of other leading organizations. 0 Fifth, as part of our improved reporting regime, we will aim to provide sector- specific information, so that we can better engage a wide range o f stakeholders on trends regarding specific technologies, whether those are hydroelectric, wind, solar, geothennal, or biomass. 0 Finally, we will increase not only our staff capacity, but also the resources at their disposal and incentives within their programs, so that we can more effectively help our country and sector teams succeed in renewable energy and energy efficiency projects, as well as more rapidly transfer best practices across sectors andregions. Improving organizational coordination 0 The experiences of the joint Department that was set up to combine IFC and Bank activities inE1are beingreviewed. 0 Lessons learnedwill be shared publicly-and acted upon. vi Ongoinalearning and review 0 A working leveladvisory group on E1will be established-with representativesof governments, industry, civil society, and others-to provide input and perspectivesto the Bank Group on extractive industry issues. 0 We will make progress reports to our Board on the Bank Group's work in the E1 sector every year-and these reports will be made public. Not surprisingly, given the range o f stakeholders and interests, the Extractive Industries Review did not lead to a consensus of all those who had been involved in the process. While there was broad agreement on the key issues, insome key areas there were different and strongly heldviews onhowthese issuesshould be addressed. And some developing country governments have stated that their views were not adequately represented. An important issue in this regard was the recommendation that the Bank Group should withdraw from investment in oil and coal indeveloping countries. Poverty reduction must be at the center o fthe Bank Group's role inthe EI. Under current scenarios overall aid resources will be insufficient to meet the MillenniumDevelopment Goals (MDGs). For many developing countries, oil, gas, andmining) are important assets that should play a role insupporting economic growth ifthese countries are to achieve the MDGs. They can be a source of employment, raw materials and energy, revenues, infrastructure and demand for local services and goods. In addition, more than 1.6 billion people do not have electricity; and 2.3 billion people depend on traditional biomass fuels, which are leading causes of both deforestation and pollution. Reducing these levels of "energy poverty" inthe next two decades is a huge challenge not just for the Bank Group, but for the entire international community. Local development of energy resources, particularly when international prices are high, can help both directly and indirectly reduce "energy poverty". Finally, all forms o f energy have a role to play, and while we strongly support a major scaling up of renewable and clean energy sources, oil and coal will inevitably continue to be major fuel sources for the world's poorest peoples for the foreseeable future. Although the Bank Group's participation inthe sector i s expected to remainrelatively small, and gas i s expected to increase its share o f WBG E1 financing by staying engaged in oil and coal we can have an influentialrole inensuring that the best environmental and social practices are followed and that the goal o f sustainable poverty reductioni s achieved. vii WORLDBANKGROUP MANAGEMENT RESPONSETOTHE EXTRACTIVE INDUSTRIESREVIEW I.Introduction 1. The most important role o fthe World BankGroup(WBG) is to help the poorest countries build capacity, grow, and reduce poverty. Achieving sustainable development and meeting the Millennium Development Goals (MDGs) are great challenges, and under current scenarios overall aid resources will be insufficient to meet them. For many developing countries, oil, gas, and mining (extractive industries-EI) are important national assets that should help these countries to achieve the economic growth and increased spending on basic social services and infrastructure that are neededto reach MDGs. Clearly, these resources need to be usedinways that meet environmental andsocial criteriafor sustainable development. 2. WBG investment inE1has been selective. For some time, the WBG has encouragedthe development of new E1 capacity by private investors within an appropriate framework of government oversight and regulation. Its direct support o f new public sector E1investment has declined as a result. WBG financing support o f private investment has been focused mainly on projects incountries perceived by investors as risky, and where the WBG has been able to bring value not available inthe market place, for example, interms o f environmental safeguards and revenue transparency. WBG E1investments currently account for less than 5 percent o f its total annual investment, and an even smaller share of global new investment in EI. In addition to financing, the WBG is active in helping governments create appropriate frameworks for the successful development of their resources and in developing capacity to better manage E1and related issues. WBG safeguardpolicies andpartnership activities have been influentialinhelping guidethe policies andbehavior o f others. 3. Inresponseto concerns about the sustainable impactofEI, the WBGlauncheda number of reviews to help assess its best fbture role inthe sector. It asked Dr. Emil Salim (former State Minister for Population and Environment, Indonesia) to conduct an independent consultation with stakeholders about its role (The Extractive Industries Review - EIR)'. And the WBG asked its own independent evaluation units for IBRDADA, IFC, and MIGA to undertake a joint evaluation o fthe outcomes o f its past activities inthe sector. The Compliance and Ombudsman's Office (CAO) of IFC and MIGA also undertook a review o f the appraisal processes o f some more recent projects. All o f these reviews have now been made public.' There are large areas of overlap intheir recommendations, although, in general, those o f the EIR report o f Dr. Salim are more wide ranging. 4. All three reports conclude that E1 can contribute to sustainable development if appropriate conditions are present. All three support a continued role for the WBG inthe sector, Views andopinions expressedinthe EIRreport are those ofthe author or ofthose consultedandare thus not to be attributed to the WorldBankGroup. Thejoint evaluation report Extractive Industries and Sustainable Development -An Evaluation of World Bank Group Experience can be ; the CAO report Extracting Sustainable Advantage canbe accessedat 1 andthey provide recommendations as to how its contribution can be made more effective. This Management Response addresses the recommendations o f the EIR report. A broad overview of the WBG response inkey areas i s given below. The Annex contains a detailed responseto each o fthe recommendations, grouped inthe categories employed inthe EIRreport. 11. StrengtheningGovernanceand Transparency Governance and E1 5. The WBG supports the core recommendation of the EIR that WBG E1 programs be tailored to the specific requirements o f each country andto the adequacy of governance, and that the sequencing of WBG interventions in E1needs to be carefully considered. Governance i s at the heart o f the development process: the overall framework o f govemance within which E1 development takes place will be a major determinant o f its contribution to sustainable poverty reduction. 6. To this end, all future Country Assistance Strategies (CASs) for resource-rich countries3 will systematically address relevant E1 issues. We will carefully assess governance risks in deciding how to support E1development, including the sequencing of,Bank Group activities. In particular, increasing the capacity of governments at the sector or national level to manage their E1better andto useE1revenueseffectively are prioritiesfor the WBG. 7. For all the E1projects that we support we will carefully evaluate governance capacity and risks at the national, sector, and local levels and use the results in decisions on sequencing our activities in EI. We will adopt a three pronged approach. For significant projects, where revenues are expected to account for ten per cent or more o f government revenue, we will require risk mitigation measures to be put in place as a condition o f financial support. For smaller projects, we will carefully consider the expected net benefits o f projects and the risks to these from weak governance at the sector and national level, and when we consider that the balance o f risks i s acceptable, we will clearly lay out our assessment inthis respect. Where the risks are deemedto betoo great and cannot be mitigated, new investments will not be supported. 8. Inrecent years, the WBG has increased its ability to assess govemance capacity andhas increasingly focused on govemance during preparation o f the CAS and in allocating International Development Association (IDA) funds. More effective approaches to tackling poor governance are central to the Low-Income Countries Under Stress (LICUS) initiative, which the Resource-rich countries are those inwhich EIs account for, or are expectedsoonto accountfor, more than 50 percent of governmentrevenues andpotentially include, for example: Algeria, Angola, Azerbaijan, Botswana,Chad, Congo(R), Congo (DRC), EquatorialGuinea,Gabon, Iran, Iraq,Kazakhstan, Libya,Nigeria, Oman, Syria, Sa0 Tome, Sudan, Timor- Leste, Turkmenistan, Venezuela,and Yemen. Countrieswith substantialresources are those inwhich extractiveindustries accountfor, or are expectedsoonto account for, 30to 50 percentof fiscal revenuesor exportsand includepotentially, for example: Bolivia, Cameroon, CentralAfrican Republic, Chile, Colombia, Ecuador, Egypt, Ghana, Guinea, Guyana, Indonesia,Jamaica,Jordan, KyrgyzRepublic, Mali,Malaysia, Mauritania, Mexico, Mongolia, Mozambique,Namibia, Niger, PapuaNew Guinea,Peru, Russia, SierraLeone, SouthAfrica, Suriname, Tanzania,Togo, Trinidad andTobago, Ukraine, Uzbekistan, andZambia. The usefulness ofthe two-tier approachandrelevanceofthe specific thresholdswill be reviewedinlightof implementationexperience; the correspondingcountry groupingswill be periodically updatedas necessary. 2 WBG has been implementing since 2002 incountries where inadequatepolicy and institutional performance precludes major financing program^.^ WBG engagement in a country is also a partnership relationship: other multilateral development banks, IMF, the United Nations, and bilateral donors all contribute to work with borrowing countries on governance issues, and the WBG seeks to complement and build on these efforts. For example, in its economic and sector work, the WBG draws on the IMF's reviews of a government's adherence to good practices on fiscal transparency andto datadissemination standards. 9. It is in this complex and evolving context that the WBG makes judgments about the appropriate sequencing o f its activities in E1 and other sectors. Helping governments build capacity is important, and it finds broad support among stakeholders. But there is considerable debate on when and how country development-including development o f E1 - can best be supported while capacity is still weak and being built. In responding to countries' need for assistance with EI, the WBG will always prioritize avoidance o f corruption and adherenceto the WBG's fiduciary principles. Established governance indicators will help assess risk and gauge developing country capacity. Inthis area, there is muchWBG expertise to draw on, includingthe WBG's Country Policy and Institutional Assessment (CPIA) indicators, as well as other indicators and information that cover issues such as the quality o f fiscal management, transparency and anti-corruption policies. Moreover, the WBG, in consultation with stakeholders, will consider development of additional EI-specific governance indicators. These indicators will be used in a consistent framework as an important consideration in helping to assess projects indifferent countries. 10. The WBG does not believe, however, that it is appropriate to depend only on such specific quantitative indicators to determine its engagement in the E1 sector or in particular projects. To be effective, the WBG needs to engage with governments whose capacities range from very strong to extremely weak. Judgments will need to be made inthe light of the WBG's experience andtaking into account all views and evidence, including a broadrangeo f qualitative and quantitative indicators and country circumstances. We will consider, for example, the involvement of the International Monetary Fund (IMF) and WBG in the country, qualitative judgments of the overall capacity of governance, the risks of conflict, and the nature of the project itself. The World Bank needs to constructively respond to what governments are aiming to achieve, and be prepared to provide financial or technical support, when there is evidence o f credible commitment to improve governance. 11. Giventhe range o f country circumstances we face-post-conflict andlow-income, stable and middle-income, small and commodity-dependent, large and diversified-and the variety o f projects we will be asked to support, a "one-size-fits-all" approach will not work. In the final analysis, the WBG will carefully evaluate expected net benefits for affected communities and for countries, their governance and other risks, and the benefits o f WBG engagement. Judgments made by WBG management about engagement and sequencing will be presentedto our Board for its final decision and the basis for these judgments will be publicly disclosed in project documents. In the case of IFC, for example, the Summary o f Project Information (SPI) or ~ See Low-Income Countries Under Stress: Implementation Overview, December 2003, available at 3 equivalent document, that is released to the public at least 30 days before investments are considered by its Board, will review the indicators and other considerations taken into account in assessingrelevant E1governance-relatedissues. Transparencv 12. Transparency of revenue payments from E1to governments is an important step toward the greater accountability and informed debatethat are essential for better governance. The WBG will be proactive inencouraging transparency ofE1revenuesinits client countries. Inadditionto ensuring that revenue inflows are transparently accounted for and disclosed, it i s critical to ensure that they are appropriately used. Much WBG governance work i s already focused on helping governments improve the quality o f their public expenditure processes and programs, and this will now go hand-in-handwith greater and more specific focus on transparency of E1 revenues. 13. We strongly support the Extractive Industries Transparency Initiative (EITI) that was launched by the Government o f the United Kingdom last year to promote E1 revenue transparency and the objectives o f campaigns such as "Publish What You Pay." We are already .working with a number o f countries to help them develop their skills in accounting for E1 revenues and inassisting them to publishinformation about their E1revenues ina consistent and useful way. The experience o f these countries will provide a model for others. The WBG believes that a voluntary approachto transparency that puts great emphasis on country initiative and ownership will generally be more effective than imposition of conditionality by donors. Implementationexperience will be reviewed with stakeholders intwo years, to assess whether progress hasbeenmade incatalyzing transparency ingovernment E1revenues. 14. In the operations that it supports, the WBG will expect revenue transparency as a condition for new investments in the E1 sector. For significant new projects, we will expect transparency immediately about project payments to governments, and that the relevant terms o f key agreements are publicly available whenever these are o f public concern (e.g., Host Government Agreements-HGAs, and Inter-governmental Agreements-IGAs); within two years we will expect transparency about materialEI-related payments to governments for all new E1projectsthat we support. 111. EnsuringthatthePoorBenefitfromExtractiveIndustries EnhancingPoverty Impacts 15. The WBG strongly supports the principle that communities should benefit from projects that affect them and that these projects should contribute to broader regional and national development goals. To this end, the WBG will work with governments, sponsors, knd communities to ensure that affected communities, including Indigenous Peoples' communities, benefit from projects as much as possible through good practice approachesto local recruitment and training, and the development of local suppliers and downstream industries. Good practice will also include components that directly benefit local communities, such as access to health 4 services, community funds, vocational training, general education, and infrastructure. In many recent projects, IFC has linkedsmall and mediumenterprise (SME) development initiativesto its support for resource development investments to broaden and deepen the impact of such projects. 16. Good consultation processes are essential, and they must engage affected communities andenable themto participate effectively inthe development and operation ofprojects. Thusthe WBG will work with sponsors and governments to help ensure that consultation processes are participatory, and that they extend through the life o f projects. Revised safeguards will include guidelines on community participation inmonitoring of projects and mediation. In addition (as noted in Section VI below), the WBG will work with investors and communities to ensure that the E1projects that it supports are broadly supported by affected communities. 17. Investors recognize that developments that are welcomed by communities are likely to be beneficial in these communities, and will tend to be more productive, less prone to disruption, and will enhance their reputations. It is important to observe that in addition to government cooperation ineachcountry withE1activities, support from the oil, gas, andminingcompanies is essential. We believe that many companies are' exercising responsible leadership through their efforts to ensure balanced and equitable projects. Thus the WBG will consult fully with industry to benefit from its experiencesandto ensurethat it participates fully-as partners with the WBG, civil society, and governments, inthe process o f change. 18. The WBG will also work with stakeholders more generally to help facilitate the application o f relevant best practice, including capacity building. Inthis respect, it proposes to establish a multistakeholder "Sustainable E1 Development Facility," with civil society and industry participation. With an initial focus on Africa, it will facilitate, through practical project experience, an enhanced contribution to sustainable development at the community level for E1 projects where the WBG is involved. 19. The WBG helps governments to design and implement suitable frameworks for E1 revenue sharing, and it can help them prepare for negotiations with investors and to build E1 management capacity to oversee and use revenues at the national and local levels. Critical components of benefit sharing, though, are usually set at the national level, often by basic laws or Constitutions that allocate ownership o f resources and royalties between landowners, developers, and tiers o f government. International practice varies considerably. In practice, setting fiscal terms and benefit-sharing at the project level, as is suggested by the EIR, is often not possible. The WBG will require that national standards for benefit-sharing are fully met for all E1projects inwhich it is involved. 5 Reportinpand Measuringthe Povertv Impactsof E1Proiects 20. We agree with the recommendations o f the Review to work with stakeholdersto develop consistent indicators o fthe benefits o f E1projects on poverty reduction, bothex ante and expost. The measurement of poverty impacts is challenging, and the WBG is continually striving to improve its performance inthis area for all projects, including those inEL Project size and other circumstances will determine the extent to which a project's ultimate impacts canbe realistically assessed. The internal evaluations o f WBG activities inE1have made an important contribution intheir review of the outcomes of past WBG E1activities. We will continue to work with other stakeholders, especially with multistakeholder initiatives, such as the Global Reporting Initiative (GRI), to develop consistent EI-specific indicators of projects' contributions to sustainable development and poverty reduction that can be used to help design and track outcomes o f projects. However, every project is different and standardindicators will not always be sufficient to fully describe a project's potentialimpacts. 21. The WBG will establish independent monitoringmechanisms inour largest projects, and encourage the development o f capacity in communities to monitor projects that affect them. However, such mechanisms will usually not be practical for smaller projects. We will help ensure that communities are well informed by requiring that investors, as part of ongoing consultation processes, make available meaningful information about the social, economic and environmental impacts o f their projects. In dealing with the private sector, the WBG will work with smaller, local sponsors to help build their capacity for community development and consultation processes. It will, where appropriate, also help communities develop their own capacities to participate effectively. Inthis context, IFC i s reviewing its disclosure policy; this review will provide an overall framework for more effective disclosure. We propose to make public the expected development impacts o f E1projects that we support prior to seeking Board approval. Artisanal and Small-scaleMining 22. The EIR has highlightedthe important issue o f artisanal and small-scale mining (ASM). By some accounts, more than a 100million people depend directly or indirectly on this form of mining. Small scale miningcan offer opportunities for development and poverty reduction. Yet because o f limited access to capital and inadequate regulation and supervision, it can also be associated with significant environmental, social, and health costs. It i s a widespread and complex issue and a major part o f the approach to A S M will necessarily lie within overall poverty and development strategies. The WBG will use its leadership in the CASM initiative (Community and Small-scale Miners) to help develop more effective strategies that can be reflected inCASs andbetter integrated into the Bank's country programs. 6 IV. MitigatingEnvironmental and SocialRisk 23. We agree that the clarity and accessibility o f our safeguards should be continually improved. The WBG has, over time, updated its policies and guidelines5 inline with experience. In a number of areas, however they are not state-of-the-art. These policies and guidelines are important not just for the WBG's activities but because they also help set the policies of governments, other institutions, and investors. Most recently, for example, 25 international banks (the Equator Banks) have adopted IFC's policies and guidelines as a basis for their own financing. Both the EIR and the WBG's own internal evaluations have indicated areas inwhich the practical implementation of safeguardsinWBG projects should also be strengthened, and we are already movingahead onthis front. 24. The IFC, for example, is now updating its safeguardpolicies and guidelines. MIGA will subsequently present similar initiatives to its Board. The complete revision process will take some time; but priority will be given to dealing early with many specific E1 issues that are included in the EIR recommendations-such as social and environmental assessments, community participation in monitoring o f projects, as well as other more technical guidelines that relate specifically to E1 including the use o f cyanide, mine closure, tailings disposal and waste management, and acid rock drainage. The Natural Habitats policy will be addressed in IFC's Implementation Guide a part o fthis process, includingconsidering carefully issues such as "no go zones". A startingpoint will be the principles and values o f bio-diversity andthe need to conserve and sustainably manage biodiversity resources. Because of the high value o f some biodiversity resources, there are, effectively, "no-go zones" inthe world for new E1investments; and IFC is considering how to best protect biodiversity both inside and outside internationally agreedprotected areas. 25. Stakeholders will have ample opportunity to comment on draft revised policies. On August 16 2004, IFC made its draft Policy on Social andEnvironmental Sustainability and draft Performance Standards public for comment. In addition, a revised set of Precious Minerals MiningGuidelines that beginto addressmanyspecific E1issueswas madepublicly available for comments inlate July 2004. V. Protectingthe RightsofPeopleAffected byE1Investments The WBG and The Rights of Proiect Affected People. 26. We fully support the importance of protecting the rights o f those who are affected by E1 projects that the WBG supports. The Bank Group will only support E1projects that have the broad support of affected communities (including Indigenous Peoples communities). This does not mean a veto power for individuals or any group, but it does mean that the Bank Group requires a process of free, prior, and informedconsultation with affected communities that leads to broad support bythem o fthe project. The IBRD/IDAIndigenous Peoplespolicy (see below) is WBG safeguards also include those for the protection ofculturalresources (OPN 11.03 anddraft OPBP 4.11) that may be an important considerationin some ET projects. 7 being revised to reflect this principle, and itwill be discussedby the Committee onDevelopment Effectiveness inthe secondhalfof2004. 27. The WBG shares a broader view of development today thanwhen it was formed, andwe continue to learn about the process o f development and what is needed for sustainable progress. This understanding is reflected inthe ways the WBGhas changed over time, particularly during the past decade. The WBG now gives much greater focus to social and human capital-with direct implications for the rights o f those impacted by projects, and for the governance of those countries where it is active. When we work with governments on such areas as education, the environment, poverty reduction, combating AIDS, and gender issues we are already dealing directly with some of the most vulnerable in society to help them exercise basic rights that are fundamental to their well being. Through our broader policies we help advance and protect important rights o f members o f the communities in which we operate. We also have many productive relationships with other organizations that have a focus on humanrights, such as UN agencies. 28. The WBG also strongly supports good practices with respect to labor policies in all its member countries. IFC and MIGA have specific policies concerning child and forced labor. IBRD/IDAhas appointed a Senior Advisor to the Office of the Managing Director, MDS. IFC and IBRD/IDAhave embarked on in-depth reviews of their approach to humanrights, an issue with implications well beyond the E1sector. Inthe coming months, Management will discuss with the Boardthe whole issue of a "rights-based" approach to development. The challenge for the WBG will be how to respond positively to emerging requests to adopt a rights-based development framework, in a way that is compatible with the roles of its several distinct institutions with their different clients and modes o f operation. IFC is revising its approach to labor and working conditions as a part of its revision of its safeguards. In its draft Performance Standardaddressingthis issue, it addsproposedprovisions concerning workers organizations and non-discrimination to existing provisions concerning child labor and forced labor. These proposals were made public for comment from August 16'h 2004 and are intended to help IFC clients developbest practices inthe context of corporate social responsibility. 29. Inaddition, the WBGwill implement specific recommendation inthe EIR on the use of security forces to protect extractive industry project sites-in line with the USAJK Voluntary Principles on Security andHumanRights. Many o fthe concerns about the potentialabuses o fthe rights o f people affected by E1projects arise from measures taken to ensure site security. The voluntary guidelines are designed to help protect against any abuse. IndigenousPeoDles 30. The WBG fully recognizes that Indigenous Peoples can be particularly vulnerable to projects that affect them due to their unique collective ties to lands, territories and natural resources. The WBG's operational policy on Indigenous Peoples pioneered among the multilateral development banks an approach ensuring that adverse impacts on Indigenous Peoplesare avoided-and where this is not feasible, those impacts are minimized, mitigated, and compensated for. The policy also requires that the benefits accruing to Indigenous Peoples are 8 culturally appropriate. Historically, this policy, in tandem with other operational policies, has playeda critical role insetting bestpractice for E1activities involving Indigenous Peoples. 31, IBRD/IDA is now revising its current Indigenous Peoples policy, following extensive global consultations with external stakeholders. These consultations have included roundtables with global Indigenous Peoples leaders and, most recently, a meeting in May, 2004 of representativesofthe international Indigenous community andthe WBG's legal staff. Following discussion by the Committee on Development Effectiveness in the second half o f 2004, it is expected that the revised draft (Operational Policy 4.10) will be made available for public comment for aminimumo f 60 days prior to the full Boarddiscussion. 32. Inaddition to providing an umbrella framework for WBG activities in E1that involve Indigenous Peoples, the revised draft policy is expectedto include importantprovisions to ensure a process o f free, prior, informedconsultation with Indigenous Peoples' communities leading to their broad support. The revised policy will also have a number o f important provisions that are particularly relevant for EI. The draft revised policy requires, for example, recognition of rights o f Indigenous Peoples to lands and territories which were traditionally owned, customarily used or otherwise occupied, and ensuring that Indigenous Peoplesreceive benefits and compensation, and rights to due process, at least equivalent to what any landowner would be entitledto inthe case o f commercial development on their land, from E1projects that are carried out on their traditional lands. As discussedabove, the WBG will only support E1 projects that have the broad support of communities that they affect. 33. When approved, the revised policy and accompanying guidebook will provide a solid basis for addressing issues relating to Indigenous Peoples and E1development. The WBG will help develop and promote best practices, and will continue to work with Indigenous Peoples groups and others to learn from E1projects or processesthat have affected Indigenous Peoples. A first discussion forum on best practices involving Indigenous Peoples inthis respect is being planned for FY05. VI. PromotingRenewableEnergy andEfficiency to Combat Climate Change Climate Change and E1 34. The WBG recognizes that the combustion o f fossil fuels increases greenhouse gas emissions that are believed to contribute to climate change, which constitutes a global threat. Climate change will probably increase climate variability and the frequency o f extreme weather events, and could adversely affect water quantity and quality, agricultural production, human health, humansettlements, andbiodiversity andecological systems inmost developing countries. Climate change will impact the poor most severely because o f their greater dependence on agriculture and subsistence living, and their weaker capacity to respond to deteriorating environments. The WBG's approach to helping its developing country members respond to the threat of climate change is consistent with the overall approach o f common but differentiated responsibilities in the Kyoto Protocol and its understanding that, for the immediate future, the burden of adjusting to a less carbon intensive world needed to be borne by the industrialized 9 countries. Inthis respect, the WBGhas been active insupporting investmentingreater efficiency o f energy use in expanding renewable energy resource use, and in developing carbon trading markets (for example, through our Carbon Finance Operations inIFC andthe World Bank). 35. The WBG agrees that renewable energy is a key route to addressing climate change concerns. Our strategy-implemented through programs and policies-will aim to ensure that economically and financially viable renewable energy and energy efficiency investments are essential ingredients inthe energy choices o f our member nations, not marginal considerations. The recent Bonn Renewable Energy 2004 Conference, confirmed that all forms o f hydro should be considered renewable and the WBG will continue to support large hydro projects. However, we will aim to grow our commitments to investments in energy efficiency and "new" renewable energy (defined for this purposes as only including hydro of lOMW or smaller) by 20 percent annually over the next five years. We will review this target regularly6. WBG support for renewable investments will be part o f its overall objective o f broadening access to energy, especially among the poor. In the coming months, the WBG will convene or participate in a "steering group" of governments, academic and research institutions, civil society, and industry that can help frame a broader agenda on renewable energy (including policy reform, research, andfinancing). 36. To foster greater collaboration across national and institutional lines, we will commit to reporting our annual performance in renewable and energy efficiency programs against the figures of other leading organizations, andas a part o fthis, we will aim to provide sector-specific information on trends regarding specific technologies, such as hydroelectric, wind, solar, geothermal, and biomass. We will increase not only our staff capacity, but also the resources at their disposal and incentives within their programs, so that they can more effectively help WBG country and sector teams to develop renewable energy and energy efficiency projects, as well as morerapidly transfer best practices across sectors andregions. 37. A key objective of our activities will be to help remove institutional barriers to the adoption o f renewables, including by addressing subsidies for fossil fuels, and failures to appropriately account for environmental costs. By these means we expect to encourage greater financial resources from both domestic and international sources to be committed to renewable energy and efficiency investments that are economically and financially viable. Even without policy barriers and distortions, some renewables may be economically more costly than conventional alternatives today. Their increased adoption will, for strategic, energy security and externality reasons, in part also depend on finding ways for developing countries to meet any additional costs. One approach would be increased aid in the form of grants and targeted subsidies from the industrialized economies. Another approach would be further development and growth of carbon finance as well as helping countries introduce renewable portfolio standards and similar market basedmechanisms that the WBG already actively supports. 38. The WBG also supports the EIR's recommendation that it should increase financing for the development o f natural gas, a clean fuel, for developing countries. The WBG has long ~~ The startingbase will be $200m-the average aggregatelevel ofWBG commitmentsto energy efficiency and renewableinvestments,so defined, over the lastthree years. 10 recognized the vital role that natural gas can play inproviding affordable and environmentally acceptable energy for development. This focus on natural gas will be reinforced in the coming years, both as a major part of the IBRD/IDA's broader Infrastructure Action Plan, and through increased financing for private gas projects whenever possible. The WBG expects that a larger share o f its financing for E1will be accounted for by gas developments inthe future. The WBG and Renewablesand Energy Efficiency The WBG is already one of the largest financiers o f renewable energy and energy efficiency in the developing world. By 2004, through its investmentsand technical support amounting to commitments o f over $6 billion ($3.6 billion for renewable energy alone), the WBG had leveraged about $10 billion inadditional financing fi-om public, private, and bilateral sources for renewable energy and energy efficiency. Since 1990, over 150projects have been undertaken in over 60 different countries, in all regions, covering biomass, biogas, geothermal, small and run-of- riverhydropower, solar photovoltaic, wind power, and energy efficiency. The contribution ofrenewable energy and energy efficiency to the WBG's portfolio has steadily grown since 1990.By 2004, the cumulative renewableenergy and energyefficiency commitments ofthe World Bank (IBRD andIDA) were about 14percentofthe World Bank`s power commitments, compared with just 4 percent in 1990. IFC's active portfolio in renewable energy and efficiency constitutes20 percentof its power portfolio. I For the WBG, supporting sustainable energy means assisting its partner countries to access the most cost- effective, best-performing, and reliable energy technologies that they can afford and that best suit their needs. Renewable energy and energy efficiency do not yet present least-cost solutions for all problems, but they increase the menu o fpossible options. It is important that renewable energy technologies should not be forced on developing countrieswhere they are not economic. However, inmany cases the reason for slow uptake of renewableenergy and energy efficiency is not primarily economic, but lies with inadequate capacity and an inappropriate policy and regulatory fiamework. Problems include the absence o f enabling regulatory conditions, inappropriate subsidy regimes, highpreparation costs for "first-off' projects, a lack of capital, lack of skilledhumanresources, inadequate market infrastructure, absence o fquality standards, andpoor information. \ WBG projects support the removal o fthese barriers so that sustainableand growing markets inrenewables canmaterialize. Importantly, giventhe energy deficit challenges, we needto move from a donor-driven approachto renewable energy development to a more commercial and market-oriented approach, so that countries can mobilize considerably more financing than is available today. While implementation o f renewables in developing countries can and should be accelerated, the industrialized countries have a crucial role to play in driving renewable energy costs down, through early adoption oftechnologies andthrough investmentsinR&D. This is particularly true for the "newer" renewableenergy technologies such as wind and solar. I 39. The WBG's role in E1 must be focused on poverty reduction and attainment o f the MDGs. By producing and exporting oil, coal, or other E1products, many poor countries can generate crucial revenues for economic development. More than 50 WBG client countries have significant E1 sectors that generate important revenues to governments. In other countries, E1 may be relatively less significant, but they are still capable o f making a valuable contribution at the local or national level. Inaddition, E1can contribute to community welfare and development inanumber ofways. 40. Modern energy supplies remain out o freach for too many o f the world's poor. More than 1.6 billion people do not have electricity, and 2.3 billion people depend on traditional biomass fuels, whose use too often contributes to the problems o f respiratory ailments and deforestation. 11 Reducing these levels o f "energy poverty" inthe next two decades is a huge challenge. While all forms o f energy will have a role to play, oil and coal are going to remainthe major fuels, as they currently account for over 80 percent o f energy supplies indeveloping countries. For this reason, the WBG does not believe that greater investment in renewables and natural gas depends on a withdrawal from oil or coal financing. We believe that we should continue to support coal and oil projects when we can ensure that the best environmental and social practices are followed. Our support inthese areas is not large relative to the size ofthe sector. Given the nature ofthese markets, WBG withdrawal from oil or coal financing is not Iikely to have any net significant impact on greenhouse gas emissions. 41. In recent years, the major part of WBG activity in the coal sector has been to help governments in the transition economies close uneconomic coal mines in a socially and environmentally acceptable way. Given future growth in coal supply and demand in many developing countries, WBG support for policy reform and new private and public sector investments that apply best practices could have an important demonstration effect inhelpinglift safety, health, and environmental standards. For example, several thousands of people are believed to be killed each year in unsafe coal mines; and coal mining and combustion inefficiencies in many developing countries offer significant scope for improvement, with both local and global benefits. Longer term, clean coal technology and carbon dioxide sequestration offer the potentialfor coal use ina more environmentally sustainable way, and there is a role for the WBGto help support such approaches inits member countries. VII. ImprovingOrganizationalCoordination 42. The WBG fully agrees that activities of its different institutions and units need to be coordinated to extract maximum synergies. The proposed greater focus on E1 in CASs for resource rich countries will contribute to this. The EIR and the WBG's own evaluation have themselves led to the development of a more closely shared understanding o f the role of E1in development and the role of the WBG. WBG coordination has also been enhanced by the joint IBRD/IDA/IFC department that was set up to combine IFC and Bank E1 activities. The experiences of this joint department are being reviewed. Lessons learned will be shared publicly-and actedupon. 43. There has been a substantial increase in social and environmental resources applied to WBGE1activities over the last tenyears. IFC isnowmainstreaming its environmental andsocial work to make investment staff more directly engaged and accountable, while retaining independent environmental and social compliance and review of outcomes. In the case of IBRDADA, thejoint internalevaluation o f WBG activities recommendeda more effective use of environmental and social specialists in project evaluations and supervision, and this will be addressed. MIGA has also recently reorganized itselfto better addressthese issues. 44. The EIR highlights the need for the WBG to better align its staffing and personnel policies with its mission. The WBG strives continually to ensure that its staff assessment processes are best practice, and it pays close attention to aligning its staff policies, including assessment policies, with its objectives of promoting sustainable development and poverty 12 reduction. As part o fthese efforts, IFC is currently introducingan innovative program to linkthe long-term development and financial impacts of projects to incentive payments for the staff who worked on them. Inaddition, IFC uses broad-baseddevelopment scorecards for departmentsand a competency framework for staffthat places emphasis on sustainabledevelopment. VIII. OngoingLearningandReview 45. Implementationo f the management responsesto the recommendations o f the EIR, and o f the internal evaluation reports, is an important element inthe larger picture o f the WBG's policy evolution. A number o f important, time bound, processesare already underway and will further refine the proposals set out in the management response. IBRDADA's revised Indigenous Peoples policy (OP 4.10) is expected to be considered by CODE inthe fourth quarter of 2005. IFC's draft Policy on Social and Environmental Sustainability and draft Performance Standards are now available for public comment as are its draft revised Precious Minerals Mining Guidelines and a concept paper for its proposed new approach to disclosure issues (www.ifc.org/policyreview). 46. We proposeto report to our Boardevery year onprogress, andthese reports will be made public. Inaddition, we propose to establish an informal working level advisory group that would meet with our Global Oil, Gas, Mining and Chemicals Department. The advisory group would include representatives from governments, industry, and civil society. It would act as a sounding boardfor the WBG on E1issues andwould help identify andpromote appropriate bestpractice. IX. FutureStrategyfor WBG inExtractiveIndustries 47. The WBG will continue to be active inassisting its member countries with policy advice andcapacity buildingto helpthem develop their E1ina sustainableway. Its financing for new E1 investments will continue to be based on the need for WBG involvement and the additional contributionit can make interms of ensuring sustainable development. The WBG generally will leverage its impact through partnerships with stakeholders (e.g., CASM and EITI) and demonstration projects that set new standards and approaches. We will continue to give a key role to WBG policies and guidelines that are used by others (e.g. the Equator banks). Our financing strategy, in E1as in other areas, will be to leverage our own financing contribution through cofinancing from other donors, and through IFC's B-Loan program. Our over-riding goal will be promotion of growth and poverty reduction and focus on this goal will inform our assistance to governments in creation o f an appropriate policy framework and capacity to effectively manage E1sectors andissues. 48. Areas of Focus and Expected Outcomes. In helping governments, our main areas o f focus will be support for creating appropriate frameworks and capacity buildingintended to help ensure that E1contribute to sustainabledevelopment. Financing support will continue to focus on private investment and include a strong emphasis on local, regional, and smaller companies (including service companies), gas and local energy supply projects, and larger projects where WBG involvement can make a significant contribution to enhanced sustainability. WBG will support newpublic sector E1investment when economic and financial criteriaare met inaddition 13 to the development impact. In all o f its investments, WBG will work with sponsors to help encourage and facilitate broader and more sustainable development impacts at the community level. 49. Improved Coordination. WBG activities will be better coordinated across its institutions. Much progress has already been made through the preparation o f the joint management response to the E1review process, establishment of the joint IBRD/IDA/IFC Oil, Gas, Mining and Chemicals Department, and improved functioning o f the Energy and Mining Sector Board. Further improvements will be made possible by a stronger CAS treatment o f E1 issues and increasedcooperation among Bank andIFC units working inareas such as community andregionaldevelopment. 50. Criteriafor Engagement. The clear objective o f WBG engagement in E1is to promote poverty reductionthrough sustainabledevelopment. We will keep this at the center of our project design, appraisal, supervision, and reporting. Inour selection and implementation o f projects we will be guided by our safeguardpolicies and guidelines, by best practices, and by our judgment. The quality o f governance i s one particularly important factor to which we will pay attention. While restrictive criteria for WBG involvement inthe sector would not serve the interests o f our client countries and their peoples, our activities inE1need to be fully informed by the national, sector, and local governance risks. We will give special attention to the assessment o f these risks and, where appropriate, to measures to address them throughout our project activities. Even when not involved in specific E1 projects, we will actively consider and help governments address E1issues, throughour assessmento f relevant E1issues inthe CAS. 5 1. Results Focus and ResourceAdequacy. Adequate resources will need to be applied to ensure acceptable outcomes. Increased focus on ensuring sustainable impacts o f E1projects will require appropriate internal resources. For example, earlier and more extended involvement of environmental and social specialists is needed to ensure better implementation o f safeguard policies and increased efforts on project appraisal, consultation, disclosure, and value-added in projects. The capacity to recover additional costs from clients may vary by WBG institution and by project. Project budgets will evaluate and reflect these factors and make a realistic allowance for the costs of staff involved inmore detailed preparations and supervision. Section XI. below presents a summary o f key commitments which the WBG has made in response to the recommendations o f the EIR and sets out a timetable for their implementation. Detailed managementresponsesto all EIRrecommendations are presentedinthe Annex. X. Summary 52. Our future support for investmentsinE1will be selective, with greater focus on the needs of poor people and a stronger emphasis on good governance and on promoting growth and poverty reduction through environmentally and socially sustainable development. In addition, we will take major steps to increase our own support, as well as to encourage and advocate for more global support, for economically viable renewable energy options and other clean fuels. Our goal i s clear: to help developing countries 14 provide their peoplewith access to clean, affordable, and sustainable sources of energy and to ensure that extractive industries contribute to sustainable development and poverty reduction. In many areas the Management Response is addressing complex issues where there are strong opposing views. W e will continue to maintain a dialogue with stakeholders on the issues, to learn as we go and to refine our approach in the light of experience and outcomes. 15 undActions inResponseto theEIRRe immendations ProcessIActions Timings 20% pagrowth ininvestment e Work with Bankregional operations:IFC & FromFY05 I MIGA infrastructureand environmentalGroups, CarbonFinanceand GEF EstablishSteeringGroup e Lead concept development for Financingand 0 Q2FY05 Policy Network as apart of GermanledGlobal Network Enhancementofreporting e Review ofreportingandmonitoring Underway Strategicstaffing survey FY05 Address relevantE1issues inCASs for resourcerich Finalize list, draw up CAS goodpractice 0 Q2FY05 guidance; compiletoolkit for LICUS Reviewofgovernance risks inprojects e Developtemplate 0 Q2F05 Review ofuse of govemance indicators Test CPIA & other indicators 0 Q3FY05 Apply on caseby casebaseas needed Ongoing Develop approachandvehicleto disclose 0 Q2FY05 ificant new projects Cas+by-case Immediately 0 Prepareguidelinesfor investors FromFY07 e Ongoing (take stock ofEITIin2 years) Ongoing Benejiting thePoor: Requireprojectsto benefit local people andhavebroad e Review new projectsandassess support inline 0 Q2FY05 communitysupport with Performance Standards. Work with sponsorsto broadendevelopmentimpact 0 Case-by-case-developbestpractice. Ongoing SMEprograms 0 Caseby case-learn from experience Ongoing Application of povertyindicators 0 Initialreview ofminingwith GRI 0 Q2FY05 Supportfor capacitybuilding 0 Use ofIFC CCF andother facilities Ongoing 0 Finalize TOR and seek funding 0 Q2FY05 0 -Enhancedwork with stakeholdersusingCASM Ongoing IFC Safeguardrevision 0 FY05 RiverineTD, cyanideetc) 0 Guidelines-e.g. PreciousMinerals 0 FromQlFY05 Reviewofno-go issues Partof IFC SafeguardsRevision FY05 Bankguidanceonnewproject categorization ESSDto issue updatedguidelines 0 Q3FYO5 Disclosure: Disclosureof expectedproject benefits To befully addressed inIFC Disclosurepolicy 0 FY05 Annual disclosureofproject impactsby investors. review-trial for E1immediately Investorguidelinesto be developed 0 Q2FY05 ProtectingRightsof People: Prior informedconsultation Developguidance on informedconsultation Ongoing reflecting goodpractices Broadcommunitysupport for projects Prepareguidelines 0 Q3FY05 Requirementsaboutuse ofsecurity forces Prepareguidelinesfor Investor Agreements 0 Q3FY05 Reviewcore labor standards IFC draft Safeguardproposals 0 FY05 Broaderhumanrights issues Await broaderWBG review FY05 OngoingLearningandReview: EstablishmentofAdvisory Group Discusswith stakeholders 0 Q2FY05 Annual review ofprogress Assessment of outcomes From 12/05 Lessonsofreview ofjoint IFC/Bank Department 0 Publication of informalreview results 0 FY05 16 Annex ANNEX. DETAILED MANAGEMENT RESPONSESSPECIFICTO EIR RECOMMENDATIONS -~__________. Part I.Pro-poor Governance __- _______________ ___- Recommendation of EIRReport _- Management Response ___ a G programs shouldbe tailored to the specific We agree that programsneedto be tailored inthis way, with the eequirements andneeds ofthe country andto the Country Assistance Strategy (CAS) providingan overall context. :xisting adequacyofgovernance-taking into Governancecapacity at the sector andnational levels will be a iccount the nature o fthe resourcesthe area is crucial factor indeterminingthe sustainableimpact o fE1 :ndowed with, the relative importance o fcurrent developments. The WBG will satisfy itselfthat the projects and mdexpectedresourcerevenues inthe programs it supportswill generate net benefits for countries and Zovernment's budget, andthe anticipated social and communities. Such judgments needto take accounto fcountry znvironmental impacts. andproject specifics, of riskmitigationthroughpolicy measures I I andin project design, ando fcapacity buildingpriorto investment or oarallel. Peoples; andgovernmentcapacity to promote WBGwouldstart by reviewingexisting indicatom of sustainabledevelopmentthrougheconomic governance developedbythe WBG andothers, inparticular diversification. 1 with WBO policies, includingthose for environmental and - social safeiuards. The more specific buildingblocks ofgovernance 1 We agree that these are amongthe key buildingblocks for required for extractive industries include the governance and EI.Promotion o fbest practice-in governance following: promote transparencyinrevenueflows, andproject implementation is one ofthe WBG's coregoals. All promote disclosureofproject documents, develop o fthe issuesmentionedinthis EIRRecommendationare the capacity to manage fluctuating revenues, ! increasingly important in the WBG's work. To further promote develop the capacityto managerevenues best practice inEI, the WBG proposesto increasetransparency ~ responsibly, helpgovernments develop modern anddisclosure for E1projects inwhich it participates. Inthe ~ policy andregulatory frameworks, and integratethe case o f significant private projects supportedbythe WBG public indecision-making processesat localand (including through IFCMIGA finance/insurance, IBRDDDA national levels. loanskredits andguarantees, as well as technical assistanceto facilitate new investment), the WBG will work to ensure both mitigation o frisksregarding inappropriate use o frevenues, and 17 ___ Part.~ Prc poor Governance 1. .~ ~~ RecommendationofEIR Report ManagementResponse key contractswith governmentssuch as Intergovernmental Agreements (IGAs) andHost Government Agreements(HGAs). For smallerprojects, the revenuemanagement risks will be carefullyreviewed inappropriateproject documents. InIFC's case, for example, it will be reviewed inits Summary ofProject Information (SPI) that is disclosed at least30 daysbefore projectsare takento Boardfor approval. Within two years ofthe date ofthis ManagementResponse (allowing time for transition), the WBGwill expect disclosureo fE1paymentsto governments inall new private sector E1projects where it is involved. More generally, the WBG is strengtheningits support for transparencythrough the Extractive Industries Transparency Initiative (EITI), inits core diagnostic andanalytic work, and throughcountry-level policy dialogue onpublic finances. The WBG andIMFprovide assistanceto governmentswith E1 revenuemanagement, macroeconomic policy, E1policy and extractions. Oncethat hashappened, the andit isincreasingly makingit akeyelementinitsCASs. Buildinggovemmentcapacity inanticipationofd l e v e ~ ois~ ~ ~ t ~ the variety ofcontextswithinwhich itmust work, including: approachintoday's complex andrapidlyevolving world, andin makingajudgment asto whether tosupport a pmject, &le WBG include a reviewofthisjudgment. Inthe case ofIFC, for work on s ~ ~ e n igovernance inparallelwithE1 n g Whenthe International Finance Corporation (IFC) See responsesto I. above. 1-1.4 andthe MultilateralInvestmentGuaranteeAgency (MIGA) consider investing inanoil, gas, or mining 18 -_- _._____.__ Part I.Pra Door Governance Recommendation of EIRReport Management Response project, they needto specifically assessthe governanceadequacy o fthe country as well as the anticipated impacts o fthe project andthenonly support projects when a country's governmentis preparedandable to withstand the inherentsocial, environmental, andgovernancechallenges. II3RDADA policy lending inthe oil, gas, and The WBG fully agreesthat supprt far new investment miningse&m shouldensure that it doesnot frameworks should notundermine appropriateenvironmental sum&reforms that streamline investment andsocial safeguardpolicies that shouldapply to developmenas prbbessesand create new contract models inthe extractive industries that undermine socialbenefits, localcommunity rights, environmental protection, or domesticprivate-sator vis-&-vis transnational companies, whichmakesbalanceddevelopmentin of WBG inthis respecthas skidtedmore toward increasing all seetorsofthe economy difficult. integratethe governmentcapacity to manageE1sectors, includingcapacity public ~ o n s u ~ a twhich will address El-related issueswhere i o ~ relevant. See also responseto 11.2beiow. RegainLeadership for Best PracticeandEncourage The WBG agrees that it should play a leadershiprole and it is ImprovedCorporate Governance: WBG to promote working to leverageits impact throughpartnerships onthe basis partnershipsto develop incentives for andadvance ofcommon long-term objectives, relative expertise, and the international application o fbest practice, such complementary contributions. Current examplesinE1include as through corporate responsibility, reputationrisk, GlobalGasFlaringReduction Partnership(GGFR), andthe adoption ofinternationalnorms andcodes Communities and Small-scale MiningInitiative (CASM), the o fconduct, as well as the creation o ffinancial EITI, anda proposedstudy ofthepolicy issues ofoilandgas instruments such as performance bonds, mandatory decommissioning. Promotion o fbestpractice ingovernanceand insurance, and fines. project implementation is one ofthe WBG's core goals inE1and other sectors. The use o f financial instrumentssuchas performance bonds, etc., will be consideredas appropriatein revisions o fIFC's guidelines as a part of its safeguards revision. _____ The WBG will work witkxvestors and governmentsto help minimize the risks and to help ensure that local communities, especially the most vulnerable, are properly compensated for poorestmembersofthe community. They should unavoidable risks, andbenefit from opportunities that are declineto finance projects where this is not the case developed inthe courseofprojects. The WBO will alsoseek to or shouldredesignthem toguaranteethat the standards of Jivingfor fmalgroups cfearly improve, the benefits. Pushfor Pro-poor Benefits fiom Extractive The W G supports comprehensiveassessments ofnatural Industries: The WBG should start by helpingclient resources, when requestedby governmentsandjustified by governmentsassess the advantages and country considerations. When requests are at the sectoralandor disadvantages ofthe oil, gas, andminingsectors project level, the WBG will advise onthe meritsof developing comparedwith other development options. It EI, incomparison withnot developing them. The CASprocess should support comprehensiveassessments o f provides a fiamework for the review ofthe overall direction o f existingnatural resourcewealth inclient countries, economic and industrialdevelopmentat the country leveland includinggeophysical surveys andmappingto help the role o fthe WBG inthis respect.At the project-specific level, with landuse planning. Ina mandatory WBG economic evaluation andenvironmentalassessment 19 ____- Part I.Pro aoor Governance Recommendation of EIRReport Management Response :omprehensive options assessment, the potential processesdo this by comparing a "with project" case with a 3enefitsandchallengesposedby each sector should `without project'' case. As appropriate, the WBG supportsa 3e addressed andthe WBGshouldevaluate precautionaryapproachfor projects that focus onnatural whether anextractive project provides the best resourcemanagement. E1developmentsare only supported qtion inthe context o fpoverty alleviation through when, inWBGjudgment, the economiccase is strongwhen justainable development andinline with the balancedwith all environmental and social considerations. WBG precautionaryprinciple. policies are designed to helpensure that affected groups are not harmedby developments and, where possible, are better off. Where governments enter negotiations with The WBG provides assistancefor governmentsinnegotiations extractive companies, the WBG should provide with E1companies, usually inthe form o fpolicy advice, assistance, possibly throughthe use o f independent technical assistance (TA) for capacity building, andassistancein consultants, to help negotiatedeals that maximize engagingqualifiedexpert advisors. The WBG does nottake part the benefits retained inthe country. IBRDhDA innegotiations directly, andprovidesassistanceinresponseto policy lendingshould support policy and appropriaterequestsfrom governments. The WBG supportsthe institutional reforms that ensurethat extractive use ofappropriate policies andthe strengtheningo finstitutions industry resourcerents areusedto stimulate more to stimulate value-added and labor-intensive economic activity value-addedandlabor-intensive sectors. ona case-by-case basis, as warrantedby the economic conditions inindividual countries. IBRDandIDA shouldhelp governmentsto plan The WBG agreesthat to the greatest extentpossible, major the integration o fthe power plants, deep-water developmentsshouldbe integrated into overall development ports, roads, and so onthat E1developmentoften plansthat canhelp ensure that localbenefits are optimized. requires into regionalandnational development When evaluatingE1projects, the WBG assessestheir integration plans. They should assist governmentsto enhance into related infrastructure frameworks. The WBG also assists positive spillover effects by helpingto create countries with the integrationo fEI-related infrastructure into forward andbackward linkages betweenmining regional andnational infrastructure developmentplans. When investments, regionaleconomies, and local requestedby governments and/or byprivate investors, ithelpsto communities. Export-oriented gas pipelineprojects, assess whether particular infrastructure investments are for example, canmakeprovisions for domestic use. economically and financially justified. The IBRD/IDAassists Effective regional planning-supporting public- governmentsto create forward andbackwardlinkages between private partnershipsandthe design o frealistic cost- E1investments, regional economies, and local communities as sharingarrangementsto create linkages early inthe part o f its ongoing TA inmanyE1projects. The IFChas a project planningc y c l e w i l l allow privately and special Small andMediumEnterprise (SME) Linkages Team jointly fundedinfrastructure to be bigenoughto that works to encourage suchlinkages. The IBRDADAsupports meetthe needs o fthe regional economy at little public-private partnershipsandcost-sharingarrangementsto extra cost. createlinkages from projects to local communities and EnsureLocalCommunities ReceiveBenefits from The WBGbelieves that communities should, overall, benefit Projects: To help ensure that local communities fromprojects that affect them. The revised Indigenous Peoples receive benefits from extractive industryprojects, policy is expectedto incorporate aprovisionto ensure that the WBG should: (a) require companiesto engage affected Indigenous Peoplescommunities receive benefits inconsentprocesseswith communities andgroups compensation andrights to due process at least equivalent to 20 ~ ~ _ _ _ _-___ Part I.Pra Door Governance Recommendationof EIRReport ManagementResponse lirectly affected byprojects inorder to obtain their what any landowner would be entitled to inthe case of i-ee prior andinformedconsent, (b) require commercialdevelopmentontheir land.As a part ofthis `evenuesharingwith localcommunities, (c) approach, the WBG does the following seventhings. (a) Itwill nandatethe use o fpoverty indicators that are requirefree prior informed consultation with affected nonitored systematically, (d) encourage the communities, includingIndigenous Peoplescommunities. ncorporation o fpublic health componentsinall Projectsthat are acceptedby communities are going to bemore txtractive industryprojects, (e) urgeNGOsto build effective bothfor communities andfor developers.Discussions he capacitiesof affected communities, and(f) help with communities should provide meaningful consultation and ;et up independentgrievancemechanisms. result ininformedparticipation. (b)The Bank Group will supportonly those extractive industryprojects that havethe broadsupport of affected communities. This does not meana vetopower for individuals or any group, but it does meanthat the Bank Group requires a processof free, prior and informed consultationwith affected communities that leads to broad support for the project bythe affected community. Our IndigenousPeoplespolicy is beingrevisedto reflect this principle, and will be discussedbythe Board ofExecutive Directors inthe secondhalf o f2004. (c) The WBG advises governmentsto ensure that revenuegoes to the regions inwhich E1projects are locatedthereby compensatingthe regions for negative impacts andgiving a sense of local benefit. Italso advises governmentsto establish revenue-sharingmechanismsthat are transparentand are robust enoughto deliverbenefits inpractice. And when involvedin projects, the WBG will aimto ensure that localgovemment provisions for revenuedistributionare metandwill work with investorsto ensure that communities benefit insome way from projects that affect them. When it comesto the specificso fthe sharingo ftax revenuesandroyalties, this is often set bynational law and governmentpolicy, and varies widely between countries. (d) The WBG placesahighpriority onmonitoringthe sustainability outcomes o fprojects, and is working with stakeholdersto identifyappropriate indicators that can serve this purpose inthe E1sector (see 20 below regardingthe GRI). (e) E1developmentsinremote areascanbringhealthbenefits to local communities not servedby governments, andthe WBG encourages investorsto incorporate these into the designo f projects and community programs. These healthbenefitsinclude clinic accessibility andanti-malaria campaigns.The IFC has an active anti-AIDS program (IFCAgainst AIDS) that it has linked to some E1projects. IFC is considering public healthissues inits review o f SafeguardPolicies. The WBG also encourages appropriate community programs that may include community funds. (f) NGOs canplay an important role inall areas ofthe EI- community interface, bothas watchdogsand as partners, andthe WBG supports this role. (g) Grievance mechanismsthat are trustedbylocalcommunities can serve as early indicators o fproblems and as forums for their solution; these willbehelpfulto investors andcommunities. The revised Indigenous Peoplespolicy is expectedto incorporatr 21 _ _ _ _ _ _ _ ~ Part I.Pro-Door Governance ___ Recommendationof EIRReport ManagementResponse provisionfor grievanceproceduresfor projects involving Indigenous Peoples. The WBG will continueto encourage inclusion o fthese mechanismsas apart of overall community developmentplans. While it is better for grievancesto be addressedlocally anddirectly betweeninvestor and communities, IFC andMIGA havethe CAO (Compliance and Ombudsman's Office) as iinindependentombudsman's office to receive andtry to resolve complaints; similarly, IBRD/IDAhave Freeprior and informedconsentshouldnot be Concerningprior informedconsent, seeresponsesto I. 13 (a) understoodas a one-off, yes-no vote or as a veto above and 1.17 below. The WBG supports free, prior and power for a single personor group. Rather, it is a informedconsultations with communities through the project processby which Indigenous Peoples, local cycle as goodpractice. It is an important component inensuring communities, government, and companiesmay that communities are well informedabout developmentsthat cometo mutualagreements ina forum that gives will affect them, andthat they have an opportunity to maketheir affected communities enoughleverageto negotiate views knownandhavethem fully taken into account. conditions under which they may proceedandan Companiesworking with the WBG havean incentive to try and outcome leaving the community clearly better off. ensure that communities welcome their projects. When involved Companieshave to makethe offer attractive inprojects, the WBGwillwork withgovemments, investors enough for host communities to prefer that the andothersto helpensure communities do benefit andtherefore project happenandnegotiateagreements onhow support projects. the project cantake placeandtherefore give the 22 Part___- I.Pra Recommendationof ELRReport ManagementResponse their specific needs, I'he WBG should be informed andguidedbythe Managementstrongly shares the beliefthat the rightsand deliberationsand conclusions ofthe UnitedNations interestso fIndigenousPeoplesand localcommunities should be Permanent Forumon IndigenousIssues regarding well protected, andit endeavorsto do so inall WBG-financed fi-ee prior and informed consent. The WBG should projects. The WBG's proposedrevisedIndigenousPeoples znsure that Indigenous Peoples' rightto give their policy (Draft OP 4.10), which will provide a framework for fi-ee prior and informedconsent is incorporated and WBG activities that affect IndigenousPeqles, I s expectedto be respectedinits SafeguardPolicies andproject- made available for public comment following discussionbythe relatedinstruments. Ideally, localgovernments Committee onDevelopmentEffectiveness(CODE). The revised shouldplay an important role insuchprocessesand draft policy will provide greaterclarity inthe WBG's approach intheimplementation andmonitoringofthe to Indigenous Peoples, including guidance on free, prior and agreementsbetween localcommunities and informedconsultation and informed participation by affected Zompanies. It is also necessaryto include covenants Indigenous Peoples communities. Italso placesgreater focus on inproject agreementsthat provide for multiparty areas such as the recognition onrights of IndigenousPeoplesto negotiatedand enforceableagreementsthat govem land andterritories which were traditionally owned, customarily variousproject activities, should Indigenous usedor otherwiseoccupiedbythemandreceiving benefits, Peoplesand local communities consent to the compensationor rights to due process. The WBG uses its project. The WBG should require the use o f safeguardpolicies, suchas those for Indigenous Peoplesand independent, experienced, objective, andtrusted Involuntary Resettlement,to ensurethat people are treatedfairly. facilitators inparticipatory processes. Professional Itrequires investorsandgovernmentsto engageinmeaningful services needto be effectively securedas part of consultationprocesseswith Indigenous Peoplesand local social and environmental assessment andbepaid communities that gives themthe opportunity to understand for bythe project proponent. projects that will affect them [see 13e)].One concem expressedby community representativeswas the lack o f capacity insome communities to effectively participate in consultationprocesses. Within the context of specific projects, investors andthe WBG should considerproactively helpingto increasecapacity incommunities through training or access to appropriate supportfromNGOs and others. IFC's Corporate Citizenship Facility (CCF) works with IFC clients and other stakeholderson such activities. Independentfacilitators have beenusedbythe WBG inparticipatory processes, andtheir use projedespecific basis, andthat the localcommunity will have equal accesstothe informationit needs for meaningful participation innegotiation localcommunities ina meaningfbl way aboutthe economic, processes. Revenueandexpenditure information social, andenvironmental impacts of projects.However, fiscal shouldalso bepublicly available duringproject or taxation, revenue collection, and sharing, andcan infomithem - Revenuesshouldbe shared among local, regional, See responsesto 1.8, I. I. and I. above. Although the 13, 17, 18 andnational govemments. Regional govemments sharingo fEIrevenuesamong differentlevels ofgovernmentand havespecific demandsput on them interms o f communities is a complex issue, the WBG agrees that where E1 planningandaddressingsuch issuesas in-migration developments imposecostson communities, these should be 23 PartI. Pro poor Governance ~~ _____ Recommendation of EIRReport Management Response andmaximizing developmentimpactsthrough Fullycompensatedfor, as aminimumresponse. IFC andMIGA infrastructure creationregionwide. An equitable already take sustainability into account inproject evaluationand share o fthe revenuesshould beprovided to local intheir institutional reporting. IFChasproducedtwo corporate communities. The WBG should consider"direct" sustainabilityreports. Inthe third, dueNovember 2004, IFC or "local andregional" poverty alleviation goals as hopesto buildonreporting o fmeasurementandmonitoringo f mandatory for the extractive industriesprojects it sustainability. finances. And "sustainability dimensions" should be consideredmandatory criteriaby the IFC and MIGA. While recognizing that datao f relevanceand The WBG agreesthat data should be collected ina consistent interest to localpeople will differ greatly from format so that it canbe comparedandaggregated; see response location to location, the WBG should attempt to to 1.20 above. ensure some commonality between localand regional datacollection andreportingmethods, includingwhat data are collected; when, how, and where they are collected; andwhere they are made available. It should also ensure this collection is carried out inamannerthat involvesthe local communities andregional bodies inways which IFC is currently reviewingits disclosurepolicy; for Elprojectsil guidelines for projects so that regional and local is intendedto ask sponsorsto make information on a project's impactsandbenefitsof investments andguarantees environmental, social, andeconomic impactsavailable each yea are systematically monitoredand, ifneedbe, to communities; see responseto 1.20 above. MIGA will review mitigatedeMarginalizedandat-risk communities its disclosure policies following IFC. Encouragethe Incorporation o fPublic Health This is an imDortantissue. E1develoDments inremoteareas ComponentsinAll ExtractiveIndustryProjects: often bringhealthbenefits to local communities that may not be Extractive industry project design andoperation providedby governments. MostE1projects fund community 24 Part I.Prc poor Governance ___ ~- Recommendation of EIRReport Management Response should emphasizepublic healthprevention and health clinics that offer basic healthcare, preventive measures, stringent risk reduction(through immunizations, etc., to employees andoften to the localpublic at large. for example, and vector control, treatedbednets, Exampleso fWBG health-relatedinitiatives inthe E1sector prophylaxis, andcondoms). Affected communities include a grant to a Canadianminingcompanyworking to should be informed o f all humanandenvironmental support AIDS-affected miningworkers andtheir families in health risks. Non-employees inthe vicinity ofa SouthAfrica. IFC has an active anti-AIDS program ("IFC project should be admitted to the project's clinic for Against AIDS'') that is linkedto appropriateE1projects.The all public healthmeasures that benefitthe project, CIDA-sponsored "Tool Kitfor Mining" (pilot stage), an especially the control of communicablediseases, HIV/AIDS resourceguide, is scheduledfor completion in andthis shouldbeincluded inthe projectplanning. November 2004. WBG social andenvironmentalassessments Extractive industryprojects should offer health require potentialhealth issues to be evaluatedandtaken into insurance or compensationfor project-caused account inproject design. The ongoing IFCreview of safeguard sickness, accidents, andtoxic legacy issues. All policies will evaluatethe utilityofincludingcomprehensive relevant WBG-supported projects shouldmandatea healthassessmentsinthe relevant sectionof environmental and health impact assessmentalong the lines ofthe social assessments.Consultation processes should inform local course manual publishedbythe WorldHealth Communitieso fpotential healthandenvironmental risks. communities is crucialto ensure effe&ive public development.The WBG provides fw considerabledisclssure of participation andto help iocdcommunities g ood sustainabledevelopment. To~~i~~ Communitydevelopmentplansendorsedbythe WBG should effectively, people needatimely disclosure ofinformation containprovision or adequate community involvement, and for Help Set UpIndependentGrievanceMechanisms: See also 13 f The WBG agreesthat mechanismsto helpaddress IFC andMIGA should ensure that there is an local communities' concerns at anearly stage are valuable for effective local complaints and disputeresolution successfulprojectdevelopment. IFC andMIGA supportthe systeminplace inaffected communities when provision o fcomplaint anddisputeresolutionsystems that supporting extractive projects. This might be done provide fair andreasonablerecoursefor local communities and through the development ofa SafeguardPolicy on provides them for large complex projects.In 1999,IFC and access to impartialdispute resolution. IBRDand MIGAestablishedthe Compliance Advisor Ombudsman(CAO) IDA should supportthe establishment oflegal and to provide individuals andcommunities impactedby IFC and regulatory frameworks, judicial reform, and MIGA projects the opportunity to raisetheir concernsdirectly arbitration tribunals for conflict resolution, which with an independentauthority. Since the late 1990s,the Public should give speedy andfair results.Relevant Consultation andDisclosure Plans(PCDP) andResettlement capacitybuildingshould support this work for all Action Plans (RAPS)for E1projects include grievance actors involved. mechanisms. Concerningbroaderjudicialand legal reform, and access o fpoor people tojustice, this is one o fthe core areas o f IBRD/IDA intervention insupportingtherule oflaw andrelated institutionbuilding. v Help Artis-kl and Small-Scale Miners: At the The WBG is already pursuingthis important objective. It will country level, IBRL)and IDA should help increaseits efforts and pay particular attention to child labor goveinments develop policies that recognize issues. Some of these issueshavealready beenaddressed in a artisanal and small-scalemining (ASM) as a guidance documeiit on MiningandIndigenous Peoples; the distinct sector andthatdistinguishbetween kidancedocument will beu&d by taskteam Iead&s in community-based miners and itinerant miners, designing projects. Explicitattentionhasbeenpaidto issuesof 25 Part I.Pra Door Governance Recommendation of EIRReport ManagementResponse givingcommunities clearpriority over mining indigenousrights andsmall-scalemining. Andthe value of rights. WBG activities relatedto ASM should UBRD&DAprojects for integratingrespectfor indigenousrights precautionary measuresto accountfor extra- uchas riverpollution, that may s, includingIndigenousPeopes' IBRDDDA should propose objectivesandstrategies to address the specific challengesofASM andwill continueto strengthen its efforts. Withregardto internal activities, includingthe very realenvironmental capacity, see responseto 1.29 on legalization andresponse to and socialproblems these sectors can cause, the 1.32 on internal WBG capacity building. All new IBFWIDA illegal status ofthese minersalmost everywhere, projectswithpotential ASM componentswill, as amatter o f andtheir lack o f access to markets for their goods. course, assessthe potential of organizedASM activity to serve IBRDandIDA should thus supportgovernments in as a platformfor longer-term householdand community social legalizing ASM andmakingit environmentally and and economic sustainability. Newprojects will also recommend socially less harmful,while helping responsible anddesign assistance programsthat promote livelihood artisanaland small-scale minersearn more from diversification andalternative livelihooddevelopment, wherever their activities. Insome instances, IBRDand IDA possible. Inthose placeswhere mininghas a community basis, a should help governments develop alternative participatory community planningprocessfor localdevelopment livelihoods for ASM practitioners through will be madepart ofthe assistanceframework. For the time community developmentprograms. The WBG being, rather than develop a specialASM unit, the Mining needsto buildthe requiredinternal capacity to Policy andReformDivision will havethis work be a function of addressthese issues, andshould form a special the team establishedfor the implementationthe CASM initiative ASM unitthat is adequatelyfunded to meet these (see responseto 1.32 below). IDAshouldassist governmentsto develop policies alreadyhelpinggovernmentsaddressthese issuesandwill that legalize artisanalandsmall-scale mining increasetheir efforts, Thisrecomendationflags anumber of the sector inthe national economy, givingartisanal project currently beingundertakenbythe IBRDADA (see and small-scale miners access to markets, The responseto 1.30below). establishment ofcooperativesmay help ASM participate inthe nationalmarketvalue chain, Policies should also outline strategiesfor addressingrelations betweensmall- andlarge-scale operators. IBRDandIDA shouldassist governmentsto The WBG will assist governmentsdo this when requested. develop the capacityto regulate a formal ASM Current IBRDDDA assistance is inkeepingwith the sector inparallel with the processo flegalizing recommendation onthe legalization andformalization of ASM ASM activities. Social andenvironmental activity, which is a comerstoneo f its work inthis area. regulations shouldgo handinhandwiththe IBRDADA projects typically provide assistance inthe drafting legalization ofthe sector, addressingissues o fnew legislation andregulations, as well as building includinggender imbalances, childlabor, and institutional capacity to implement new laws andregulations. environmental management, particularly the use o f While sensitivity to gender, childlabor, andenvironmental 26 PartI. Pro poor Governance ___ ~- Recommendation of EIRReport Management Response toxic substances. Social andenvironmental impacts issueshas increased, and efforts havebeenmadeto buildthis should also be addressedthrough support for direct into the designof assistance, change inpractice is not easily capacitybuildingactivities o f artisanaland small- achievedifleft at the level o fpolicy and law. For this reason, scale minersto helpthem avoid, minimize, and recentIBRD/IDAprojects have includedtraining and capacity- mitigate environmental andsocial impacts. building initiatives, demonstrationprojects, and community- basededucationto increase awarenessand skill levels among miners. Moreover, IBRD/IDAwill increasethe effectiveness and reachofthe CASM small grants program, which works to build local capacity within communities andminers' associations.In April 2004, IBRD/IDA held aworkshop with stakeholderson Help GovermnentsIntegratethe ASM Sector into National and Regional Development Plans: The WBG should provide technical assistancegrants to governmentsto help integrateASM into rural developmentpolicies and to include the sector within the wider economic and social governiiient planningofpoverty alleviation strategies.Solutions to the problems associated with ASM could be inore ellectively addressed through rural development.Government capacity to deal with this sector could be improved through exchange programsduringwhich officials visit countries where a Iegaiized ASM sector has clearly contributed to poverty alleviation, such as in Papua New tiuinea, where projects have exemplified greater awareness of environment and safety issues, increasedproduction, and successfulclosure. Develop Pilot Programsin Partnershipwith Others: Agreedthat a variety ofapproaches needto be tried. IBRD/IDA The WBG shouldtry a micro-lending approach to will identify opportunities for working with other organizations ASM in cooperationwith aid agencies and other (including NGOs, donor agencies, academic institutions, donors. Pilot projects could be developed in incorporated communities, andCASM) on IBRD/IDAprojects partnershipwith, for example, CASM or CAMMA, andprograms, as well as onASM activities andprojects external the Mines Ministersofthe Americas. This form of to and independentofthe IBRDADA work program. These financial support should be coupled with technical "partnerships" willbepromoted by IBRD/IDA directly and support and educationdesignedto create through CASM. Financial resourcesfor the support ofpilot opportunities to sell products at more competitive programsundertakeninpartnershipwith others willbe prices, incentivesfor better environmental generatedfrom intemalIBRD/IDA andexternal sources. An management, a greater commitment to health and application is being made for internal IBRD/IDA trust funds to safety, and other improvements designedto put this sponsor ASM partnershipprojects outsidethe IBRDADA sector on a more sustainablepath. framework, which would be coordinatedby CASM. IBRD/IDA and IFC will also set up a pilot project to test amicro-financing facility w S M indifferent country andregional contexts. - - - - 27 loor Governance NationalASM policies should also addressthe The WBG accepts the important of these issues, andis working integration ofthe sector inthe national economy, :owadthese objectives; see responseto 1.29 above. giving artisanal andsmall-scaleminersaccess to markets. Social andenvironmental regulations should go handinhandwith the legalization ofthe sector, addressingsuch issuesas gender imbalances, child labor, andenvironmental management. ________ __ ~ ~ ~~~ 28 ______ Part 11. Environmentaland SocialComDonents ofWBG Interventions - ..~. ~ _ _ _ _ ~ _ _ RecommendationofEIR Report ManagementResponse RequireIntegratedEnvironmentaland Social rhegeneraldirectioninWBG oDerationshasbeentoward a Y ImpactAssessments: The WBG shouldtake a holistic approach, as exemplified insupport for countries' holistic, multidimensional approachto ComprehensiveDevelopment Framework, PSRps, and similar assessments, identifyingcumulative impactso f processes. The preparationof strategic environmental andsocial projects andsocioeconomic linkagesto assessments, inwhich cumulative impactsassessmentis akey environmental issues. Social impacts shouldbe deliverable, has becomemore common. The 1998IFC filly identified, includinghealth impactsand Environment and Social Review Procedureintroducedthe projects' effects on vulnerable groups. And a requirementfor a cumulative impacts assessment. Lessons strategy for impact prevention, minimization, and learned, inpart inEI, are beingusedto refine the strategic mitigationis needed. environment and social assessment andIFC's cumulative impactsassessmentrequirement. The IFC's December2003 GoodPractice Note, Addressing theSocial Dimensions of Private Sector Projects, indicateshow to better addresssocial impactsand suggests innovative mitigation actions. IFC's current safeguardsrevisionwill advance the integrated(holistic and multidimensional) social and environment assessmentagenda. Extractive industry projects should be classified While many E1projects are categoryA, the WBG believes that as CategoryA projects-likely to have significant categorization o fprojects should continue to be made in adverse environmental impacts-unlessthere are accordancewith OPBP 4.01,EnvironmentalAssessment, and compelling reasonsto the contrary. applied consistently across sectors. Categorization should be understood as ariskmanagementtool. Some E1projects, particularly inexisting oil producing or miningareas, or 29 .__..__ _ _ _ _ _ _ _ _ ~ - - ~ - __ Part 11. Environmentaland SocialComponents ofWBG Interventions ~ - --I __ ~~ Recommendation of EIRReport Management Response incrementalenvironmental or social impactsthat wouldjustify a ~ Category A rating. Suchprojects wouldbe classified as Category Baccordingto OP4.01 sincetheir impactsare site-specific in natureandmitigationmeasuresare readily available. a&own "biological hotspot" mustundergo the significant conversion o fnaturalhabitats unless there are no additional alternative developmentstudies. feasible project alternativesandsiting, andcomprehensive analysisdemonstratesthat overall benefits from the project substantially outweigh the environmental costs. See 4 aboveand 30 Part 11. Environmental and So( ialComnonents ofWBG Interventions Clear "no-go" zones for oil, gas, andmining As set out in4 above, the WBG highly values biodiversity and projects should be adoptedonthe basis ofthis recognizesthat there are circumstanceswhere developments policy. should not take place, whether these are E1or other forms of development. Current WBGpolicy inthe areanow takes a precautionary approach, as requiredby OP 4.04, Natural Habitats.Itclearly recognizesgovernmentdecisionsto make areas off limits. It alsorecognizesgovernment intention for multipleusesofareas ofbiodiversity and, therefore, focuses on minimizing significant conversionand degradation.This issue will continue to be reviewed within the WBG's evolving environmental policy framework. InIFC's safeguardreview, the issue o fno-go zones is beingconsideredinthe context outlined R Compensationandproject-derivedbenefits shouid leadto genuineimprovement, assessedby people are at least as well off, andpreferably have improved independentreputablethirdparties. livelihoods, following resettlementandthat alternative livelihoods are sustainable. The recent BoardapprovedBaku- Tbilisi-Ceyhan (BTC) pipeline project includes an independent thirdpartytaskedto verify this objective inthis largeproject. The practice appears potentially applicableto other large projects will beevaluated aspart ofthe IFC safeguardreview. The 11. IBRDandIDA shouldprovidetechnical assistanceto governmentsto helpthem governments for national resettlementlegislation. This is incorporateall these principles as a basis for undertaken when requestedby the government, anddeemed nationalresettlementlegislation. appropriate inthe country context. Good andfair legislation in 31 Part 11. Environmental and Social ComDonents ofWBG Interventions - ..~. ____ Recommendation of EIRReport ManagementResponse this area contributesto the quality ofgovemance andthe - effectivenessofpoverty alleviation policies. tevise the Disclosure Policy: The WBG ~sclosurePolicy should be broadenedto include L seriesof documents currently protectedby ionfidentiality agreements betweenIFC, MIGA, mndcompanies. Protectionofee proponent's aboutitsactivities. IFChashelpedsecurethe approval of echnical pmcessesshould be ~ ~ a n ~butd , sponsorsandgovernment for the fullpublic dhclosure ofkey e this ieedsto be achieved with less confidentiality. agreements incertain m j o r EIprojects. Recognizingthe issues raisedby the EIR, disclo&re ofthe terms o f a&eem&ts (such 8s lGAs and HGAs) will bemadestandardWBG policy for significant new private E1projects. Within two years, allowing time finimplementation, the WBG will expect all El paymentsto governmentsto be disclosed. Insome areas that are not essential for the public interest, companiesmay needto maintain confidentiality to protect their legitimate commercial interests. and IFC will work with them to ensurethis. The WBO has three disclosurepolicies that reflect the activities o f IBRWIDA,IFC, and MIGA, respectively. IFChasembarkedon areview of its Disclosure Policy for allprojects, andM E A will do so following the 1FCreview. $11relevant project documents needto be The WBG agrees that that relevant project documentsbe made ranslatedinto local languages anddisseminated available in local languagesand in a culturally appropriate naculturally appropriateandtimelymanner. manner; this is current WBG policy. Inthe El sector specifically, Specifically, environmental and social IFC intendsto require investorsto make information about nonitoringreports needto be disclosedduring project environmental, social and economic impacts available to iroject implementation. IFC andMIGA should the public on a regular basis, and it will provide regular reports .equire disclosure o fenvironmental and social on the impacts of new El projects after Board approval. The issessmentsprior to appraisalfor all Category A WBG requires investorsto consult with local communities and mdB projects andat least 120days prior to disclose a draft ofthe environmental assessment as part ofthis xoject approval, inorder to allow meaningful consultation. IBRDADA appraisal for Category A and B projects :onsultation andparticipation o fthe public. The cannot beginuntilan environmental assessment, Resettlement WBG should enhance disclosureafter project Action Plan, and/or IndigenousPeoplesDevelopment Plan (as :ompletion, especially evaluationso fprivate- required) have beenprepared, consultedupon, and disclosed. In ;ector project operations. the case o f IFC, an approveddraft ofthe environmental and social assessment or environmental assessmentand relevant social safeguarddocumentsare disclosed in-country, includingto the local community, for at least 30 days before Board presentation.A 60-day disclosure period for safeguard documents is used for IBRDIIDA guarantee operations. The issue of the disclosure of evaluations ofprivate sector operations will be addressedas part o fthe revision o fthe IFC Disclosure Policy (see 11.12 above). ~ _ _ _ Vet benefit analyses-including revenue flows to The WBG agrees that the evaluation o fprojects should assess net &e national as well asthe locallevel, mes, and benefits as described. 1BRDADA publishthis evaluation intheir project appraisal documents. IFC'MIGA publishthese where they are consistent with their respectivedisclosure policies. At IFC, these are currently underreview, and MIGA will then m e e ngoveme review them as well (see 11.12 above). When govemments so xmpanies inorderto ailow comparison o f request, the WBCi provides technical assistance concerning El SiEerent arrangements. coniractuaf and fiscal terms bestpractice, and comparison with ,..-- 32 ~ _ _ _ _ _ _ _ - _ _ . _ _ ~ ~ --Part11.EnvironmentalandSo_________ ~ _ _ ~ _ ~~- ialComDonentsof WBG Interventions Recommendation of EIRReport Management Response arrangements inother countries. The WBG should disseminateits Disclosure The WBG will take measuresto ensure that its disclosure Policy morebroadly at the start o fthe policies are made available to affectedpeoples early inthe environmental andsocial assessment processin project cycle. The WBG will examineits policies conceming theearlydesign phaseofextractive projects, so disclosureofinformation by financial intermediaries(see that potentially affected peopleknow what responseto 11.12 above). This issue affects all WBG operations information is available to them. The WBG with financial intermediaries,notjust those inthe Elsector. should expedite access to ensure that potentially affected people get prompt andtimely access to the informationthey need. The WBG should mandatesimilar disclosure o finformation and transparency standardsfrom its financial intermediaries andshould regularly monitor and InformationOmbudsmantomonitor disclosure Develop Sector-specific Guidancefor Tailings This processwas initiated inDecember2001when IFC issued Disposal, Waste Management, andthe Use o f the HazardousMaterials ManagementGuideline, and it is Toxic Substances: The WBG should develop a continuing with the draft o fthe revised PreciousMinerals list o fcriteria for tailings placement for all MiningGuideline that was available from July 2004 andthe miningprojects. plannedWBG updatingo fthe 1998PollutionPreventionand AbatementHandbook(PPAH), beginning inJune 2004 and ___ Submarinetailings disposal (STD) should not be The WBG would only support the use o f STD after careful useduntilbalancedandunbiasedresearch, evaluation; however, it would not rule out STD where it is accountableto balancedstakeholder clearly the best option and is environmentally andsocially management, demonstrates its safety. acceptable. The WBG is representedonthe International SteeringCommittee, Deep Sea Tailings PlacementProgram. T h i s i s an industry-sponsoredinitiativeto (a) identify gaps inthe knowledge on impacts, and (%)undertakenecessaryresearchto fillanygaps. Findingsofthis exercisewillbeconsideredbythe usedinareas suchas coralreefsthat have important ecological functions or cultural signii"icanceor incoastalwaters usedfor subsistence purposes. disposaloption(see also II*8 and11-19above). I WBG supportfor minesusingtoxic materials The WBG agrees with the need for carefid use o fprocessesand such as cyanideandmercury should be toxic materials that would pose risks to the environment ifnot minimized; where possible, safer substitutes properly planned, managed, and monitored. Issues of"no-go shouldbeused. technologies" are beingexamined inthe review o fIFC's policies andguidelines (the drafk revisedPreciousMinerals Mining Guideline that was available from July 2004). The WBG will continue to work with industryindeveloping goodpractice procedures that minimize risk.. The WBG agreesthat the use of 33 ____ a1Components of WBG Interventions __ Recommendation of EIRReport Management Response boxic materials should be minimized, but it must berecognized hat inmanyoperationsthere is notechnical and commercial altemativeto the use ofmaterials such as cyanide. Insupporting projects, the WBG will carefilly review the operator's procedures for transporting, storing, using, and disposingoftoxic materialsto ensurethey are inline with the HazardousMaterials - ManagementGuidelines (see I117above). The &fl PreciousMinerals MiningGuideline that will be made I I _.-__________ - ! I`he WHO needsto revise its cyanideeffluent guidelines to be consistent with the most public for commenl in July 2004 addresses this issue (see also dvanced guidelines in Canada, the United States, and the Europea~iUnionor to be adequate __ roprevent environniental degradation. !3. DevelopGuidelines for IntegratedClosure The WBG agreesthat planningfor E1site closureis important. Planning:IBRD and IDA should develop clear The WBG will develop a more comprehensiveapproachto mine pidelines and require provisionfor sufficient closurethat addresseskey issues, such as environmental and funds to be built up in the balancesheet for social effects, disclosure, and appropriatefinancial provisions ;losure from the start o fany new development. (including efforts to secure independentfinancial provision, when possible and consistentwith locallegislation). This is currently beingconsideredinthe preparationofthe revised PreciousMetalMiningGuideline. Italso will be akey consideration inthe plannedupdating ofthe 1998 Pollution Prevention andAbatementHandbook. IFC is alsoplanninga - t4. - 25. andResponse: WBG emergency responseplan beeninplace sinceDecember2001. Inparticular, community guidelines should involve ways to establishgood involvement is akey part o fthe guidelines. The ongoing lines o fcommunication for waming local updating o fthe 1998Pollution Prevention andAbatement communities, sufficient recognition o fpotential Handbook willrevisit the guidelines usinglessons learned fkom impacts, andadequate monitoring and initialexperiences inEI. The WBG will continue to work with maintenance. Suchpractice should berequiredin govemments onreforms o fnational legislation to better address IFC andMIGA projects andencouragedin emergencyprevention andresponse. - reforms o fnational legislation andregulation. - 26. The December2001HazardowMaterials Management - 27. The WBG shouldmandatethat projects it supportsonly use safe, modem, andwell-run vesselsto carry oil or hazardouscargoes. Safety 34 ______ - ._ Part 11. Environmentaland Sot ialComponents ofWBG Interventions- - .- _. __ Recommendation of EIRReport Management Response andage criteriaandlabor standards shouldbe MARPOL.However, becauseoil from most projects is blended requiredfor all suchvessels, along with with other crude streams andoil salesare often not handledby systematicandstringent inspections. the sponsor, it i s not always possibleto enforce requirements on -- Address the Legacy ofthe Past: Compensation h d sshould beestablishedfor peopleaffected production facilities, are a major concerninsome countries and by past tfevelopments. regions. The WBGhasprovidedconsiderablesupport for mine assessingandprioritizingneeds. A key priority isto avoid The WBG should establishatargetedprogram This is an important issue inmany areas with a longhistory o f E1 aimedat restoringdegradedlands, improvingthe operations, andthe WBG will increase its efforts to identi@ life ofthe poor who are affected by previous suitable areas for intervention anddiscussionwith governments. project closures, andgeneratingemployment and The WBG alreadyundertakesa considerable amount ofwork in skills training. this area and has financed some projects. However, financing of specific remediation and post-closureprojects will generally dependuponthe willingness andability o fgovernmentsto borrow from the WBG for such purposes. ______ ___ 35 ____~_- ~ ~ _ - _ _ - _Part _ __ ~ ~ _ _ _ _ _ ~ _ 111. HumanRights -_____________________ Recommendationof EIRR e p o ~ ~ - i - - ~ ManagementResponse _____ 4 system-wide policy needsto integrateand The WBG draws onthe values ofhumanrights inall its work. _____I mainstreamhumanrightsinto all areas ofWBG Inaddition, ithasreviewsunderway to considerhowto engage policy andpractice. I ' with humanrightsissues. IBRDADAhasappointedasenior advisor within the OEce ofthe ManagingDirector, M D Sto helpcoordinatethis work. IFC's PerhrmanceStandardadd ' proposedprovisionsconcerningworkers discriminationto existingprovisionsconcerning child laborand organizationsandnon- forcedlabor. Theseproposalswere madepublic for comment from August 1~52004. InbothIBRD/IDA andIFC, human ' ~ 36 lumanRights ! Recommendation of EIRReport ManagementResponse 1 andenforcement ofthe s ~ ~ ~WBG cooperation with unions is improv . secondments ofunionstaffto the WC3 andreplax RecognizeIndigenousPeoplesand Their Land The IBRDODAIndigenous Peoplespolicy is currently being Rights:IBRDandIDA should work with revised andis expectedto go to CODE for review inthe second governmentsto clarify and strengthen, where halfo f2004. The revisedpolicy is expectedto give greater necessary, the legalbasisfor resourceandtenure focus to recognition ofrights ofIndigenousPeoplesto landand rights. territories traditionally owned, customarily usedor occupiedby them. The WBG should not supportextractive industry See responseto 111.7 immediately aboveand 1.15-17, The WBG's SafeguardPolicies shouldbecomean Seeresponseto 111.1 above. explicit tool for ensuringthat the WBG respects n o n d ~ c ~ i n a but~alsothroughensuringthat t i , I W ' s approachto review andassessment inits review of its social management, community development, and safeguards. Women may bethe most vulnerable group, WBGE1context workingwith stakeholderstoreviewthis issur hassaarted Uithe (e,g.* the recentWomeninMiningConferenct needto be supplementedby awareness ofEl-speciffc issues. The current draft SafeguardPolicy on Indigenous IBRD/IDAhas initiateda seriesofmeetingswith Indigenous Peoples (OP 4.10) should be reviewed andthere Peoples' leaderson a broadrange o f issues, includingthe draft shouldbehigh-level discussionswith Indigenous revised draft OP 4.10 on IndigenousPeoples. Part ofthis Peoples on its revision, including a legal process includedroundtableswith Indigenous Peoplesleaders roundtable on makingthe policy consistent with and a meeting heldbetweenrepresentativeso fthe intemationa internationally guaranteedhumanrights. Indigenous Peoplescommunity and the LegalDepartment o f IBRDADA inNew York inMay 2004. Inthe specific areaof best practice inE1projects involving Indigenous Peoples, the WBG plansadditional meetingswith Indigenous Peoples' 1 leadersduringthe secondhalfof2004 to M e rthis dialogue. ,1 37 I I-- PartIV. WBGI istitutionalPriorities _ _ _ _ _ _ _ _ _ ~ ~ ~ ~ ____________- Recommendation of EIRReport Management Response Make Necessary Institutional Changes: The WBG rhe WBG recognizes that it should continue to evolve and does not appear to be set up to effectively make institutional changesto be more effective inpursuing its facilitate andpromote poverty alleviation through mission to fight poverty andimprove the living standards o f sustainable development inextractive industries in people inthe developing world. Examples ofrecent changes the countries it assists. includethe increased devolution o f work to client country- baedoffices andcloser coordination betweenIBRDhDAand IFC inkey sectors(including EI). To improve effectiveness and addressglobaltrends, IBRD/IDAimplementeda wide-ranging internalreorganization in 1997-98, and IFC was reorganizedin 2001. Inthe E1sector, IFC andIBRDADAputtheir activities into a singlejoint department to help ensure better coordination. n i s is under review and lessons drawn will be made public and implemented. Adjust Sraff Composition andIncentives: Success The W G wee§that staffneedto work towardgoals that are compliance with Safeguard Policiesand maximizingpovertyalleviation impacts. period of severalyears betweenprovidiigadvice or making work. Giventhe natureofthe WBG, multiple intermediate i f sustainable development andthe volume of investments. The whole range of staff incentives should be The WBG, incommon with most other large organizations, has considered when adjusting staff incentives, a well-developed staff policy that includes a range of incentive: including awards andreprimands, promotion and andsanctions. Theseare continually reviewed, andinclude demotion, pay raises and cuts, andhiringand consultation with WBG staff (through their Staff Association), firing. Giventhe time lagbetweenproject cause under the oversight o fthe WBG Board. A staff member's track andeffect, retroactive performance adjustments record and employment history are fully taken into account in may be necessary. considering promotions or other staffingactions. IFC is currently piloting an innovative long-term performance assessment schemethat links rewards to the outcome o f projects undertaken inthe past five to seven years. 14. The WBG should adjust the skill mix of its staff, Management agreesthat the WBG staff mix should adjust to includingthe staff ofconsulting firms, to i n c r e w es. For example, fFC's environmental and the ratioofpeople with knowledgeof social, social staffnumbers have increased substantially inthe lastten enviwonmental, andhumanfights aspects of years>despite a level ofE1businessthat is relatively ..... i! effort that the W13G putsintoa sector by staffnumbers alone, Muchenv~onmenandl social assessmentworkisdoneby ~ 38 istitutional Priorities -. _. Management Response numbersof environmental and social staft; relative to other specialist groups, is often not agoodindicator of the composition of inputsinto project preparationand evaluation. - 5. The WBG is increasingly involving outsideparties with External Parties: Inaddition to internal staff, appropriate authority andexpertise-toadviseon andmonitor monitoring systems should involve the public and large andcomplex projects. Sucharrangementsare inplace for outside expertsto provide early warning o fany the Chad-CameroonPipeline Project andthe BTC Pipeline previously unforeseensocial or environmental Project. imnact. dfanextractive industrvmoiect. 7. EnhanceSocial andEnvironmental The WBG cooperates closely with the IMFonall areas Accountability for Joint WBG-IMF Operations: involvingcountry economic andfinancial management, The WorldBankGroup should enhance social and performance, andbasic lendingpolicies. Improvementsinthis environmental accountability and collaboration cooperationare continually being sought. IBRD/IDA undertake betweenWBG and IMF lending operationsin regular monitoring ofeachcountry's poverty, social, and countrieswith significant extractive industries.To environmental managementindicators, andthese are essential begin with, the WBG should institutea inputsinto the CASs that are preparedregularly for all active monitoringmechanismofpoverty, social, and borrowers. Poverty, social, andenvironmental policies are environmental managementindicators to evaluatedannually inthe Country Policy and Institutional complementthe 1"s macroeconomic Assessment (CPIA). - alleviation and sustainabfe development. 9. StrengthenEnvironmental and Social Protection The WBG agreesthat environmental andsocial issuesneedto inIBRDhDAPolicy Lending:Povertyandthe be consideredinall operations. Environmental andsocial environment shouldbe accordedstrategic impacts ofoperations should be addressedinprogram design importanceindesigningand implementing andimplementation, to the extent practical for eachproject. structuralreformprograms that involve extractive IBRDhDA'sapproachto treatment of environmental andsocial industries. issues inadjustment lending is underreview, with public consultation onupdating the relevant Operational Policyhaving _--____ Update, Implement, and EnsureCompliance with Safeguard Policies Relevant to Extractive Industries:Serious efforts shouldbe madewithin the WBG to review, improve, and updatethe - 39 , ~ _ _ _ _ _ _ - _ _ _ _ ~ - - ~- ~- Part IV. WBG InstitutionalPriorities Reporton Lessons Learned: The WBG should The WBG agrees onthe critical importanceoflearning lessons Systematicallyreport on lessonslearned, good or from current andpast activities, andreporting onthese. The >ad, from its interventions inthe extractive sector. WBG undertakesevaluation ofprojectsthroughOED Sucha report should be linkedto monitoringo f (IBRDLDA), OEG(IFC), andOEU(MIGA), as well as other mpacts and should be readily available to staff intemal units (CAO, QAG, etc.). The internal evaluation o fE1 xeparing similar projectsto ensure institutional that took place inparallelto the EIRis anexample ofthe type learningandprevent the repetition ofmistakes. o fwork that is regularly done bythese groups for the sectors, Lessonslearned should also be reported countries, and projects inwhichthe WBG operates. Inaddition jystematically inAnnual Reportsto assure to specialreports focusing on sectors, regions, or projects, the institutional accountability. Adjustments in internal evaluation departmentsproduceAnnual Reportsthat individual projects as well as project concepts provide an assessment o fperformanceinall WBG operations jhouldbe madepromptly when the lessonthat is andwork, andallow regular monitoringofperformanceand learnedis that a project hadunintendednegative lessons for the E1sector (and all other areas). Adjustments to impacts. individualprojects are often madeto reflect lessonslearned, ___ both positive andnegative, duringimplementation. Actively Promote Suslaiiiable Energy Policies, Energy Efficieiicy, Recycling, and Cleaner Fuels, Especially Kenewables: IBRDand IDA should Countriesshould be helpedto remove subsidies Agreed that subsidies for carbonhels, except where apart of a komcarbon-basedfuels. targeted, selective approachto serve the poorest, should be removed wheneverpossible. A consistent feature of WBG policy advice andinterventions inthe sector is to encourage governments to remove subsidiesfrom energy prices and replace them with social transfer paymentsto the poor where needed. The issue o fapplying extemalities, suchas possible global costs o f climate change, is more complex, giventhe absence of any agreedconsensusbythe WBG member countries about the application ofsuchcosts to national benefit analysis, andsignificant uncertainty about appropriate economic values for GHG emissions.The WBG will encourage governments to calculate the potential impacts of GHG emissions, as a way of identifying low carbon alternativesthat may be able to access carbon trading credits. 40 istitutionalPriorities ManagementResponse - The WBG shouldphaseout investmentsinoil The WBG is active insupporting renewable energy and xoduction by 2008 anddevote its scarce increasedefficiency investmentsandwill work with partnersto `esources to investments inrenewableenergy increasethe importance o fthese inits membercountries (See resourcedevelopment, emissions-reducing IV.14above). The WBG believesthat adopting apolicy of projects, cleanenergy technology, energy withdrawal from coal andoil would not enhancethis effort and :ficiency and conservation, and other efforts that would not be consistent with its mission to fight poverty and le-linkenergy usefrom greenhousegas improvethe livingstandards ofpeople inthe developing world :missions. Duringthis phasingout period, WBG for the following reasons: (a) there would be no reduction in investmentsinoil shouldbe exceptional, limited global oil use, andconsequentgreenhouse gas emissions, since onlyto poor countrieswith few alternatives. oil supplies would either be producedwithout WBG financing (which is avery small proportionofthe total) or wouldbe made upfrom surplus OPEC capacity; (b) where the WBG couldnot engage inprojects, despiterequests from governments and private sponsors, the result would be apotentially lower quality ofproject compliance withkey environmental and social safeguards; (c) it would unfairly penalize small andpoor countries that needthe revenuesfromtheir oilresourcesto stimulate economic growth andalleviate poverty (e.g., Chad); and(d) itwould not free upadditional WBG resources for financing for renewableenergy, efficiency, andrelated projects. since such financing is not limitedby financialresourcesbut __._--________ The WBO h a s s t h e last few years not invested innew coal miningdevelopmeni. This should continue. - 41 PartIV. WBG 1 istitutional Priorities Recommendation of EIRReport Management Response codmines (see 15). The WBGbelievesthat, as inthe ease of a phase-out ofoil ~ v e ~ ~adopting t s , this policy wouldnot be globalpollution. The coalindustry isa major current and environmental andsocial best practices, andto mater - - ei`ficiency ofproduction anduse. 17. BRDandIDA should acceleratethe help given to The WBGagreesthat thephasingout ofuneconomicand :ountries to phaseout uneconomic and environmen&ly unsoundcoal mining, with appropriatesocial, :nvironmentally unsoundcoal miningby helping environmental andeconomic mitigation measures, is an hemaddress any negativeeconomicimpactsofa importantpolicy priority inmanyofits membercountries. The yhase-out andbridgeatransition to cleaner vast majority of WBG financing to the coal sector inthe past :nergies. Mineclosure strategiesshould recognize decade has been for mine closuresandassociatedsocial and he highdependence of miningcommunities on community programs. This is expectedto continue, andthe his source of income and employment and should WBG will work to increase its involvement inthis areathrough xovide adequate compensation,job creation, and dialogue with its member countries. Itwill also continueto miningto affected workers andcommunities work with local governments, workers, andother stakeholders yeforehand. Any such strategiesshould be inthepreparationandimplementationofthese types of lesigned and implemented with the participation operations. - _.____ 18. The WBG will examinethe proposal for suck a "just transition fund," as one ofthe meansof improving interventions inthis eck usedto safety nets. The fundcouldbesupportedbytrust mitigatethe impact ofmine closures, andthe WBG hasapplied &ids fbmindustrialcountries, inlightoftheir these inits projects, (See TV.17 above.} - 19. kingmaterialsmorethan once is anotherform of The WBG agreeswiththe importance ofmaterialsrecovery anc :fficiency, andthe WBG should help recycling, and stands ready to provide assistanceinthis area, Zovernments develop economic instruments, according to demandfrom its membercountries. 3olicies, andincentive systems that promote naterials recovery andrecyclingthrough effective :ollection systems andthe creation ofmarkets, :ducation, andincentives for waste separation. Recyclingneedsto beregulated to ensure it is Zonductedina way that is bothsocially and The WRG will respond to increaseddemandfor financing for renewablesfrom bothgovernments and private sector. Its mentannually. -proposed is intendedto &crease effective demandby helping;remove - strengthenedapproachto renewables(see 14 and 15)' policy andother barriers and atso, where possible,by 42 . - _ _ _ _ _ _ - ~ _ _ _ _ ~ ~ -___~ _ _ ~ __-_-___ PartIV. WBG InstitutionalPriorities --I_ The WBG agreedthat proper organizationis keyto capturing the many dimensions ofrenewableenergy andconservation team for renewablesand energy conservation. investment.While there is no centralizedrenewableenergy and conservationunit inthe WBG, anumberofunitshaveprovided support inthis area, The WBG believesthat this multi-unit approachthat can, for example, linkupmoreeffectively with country programs, together with central coordination, is most effective inmainstreamingrenewablesandefficiency in membercountries, but it will keepthis approachunderreview, especially as apart of its renewedapproachto renewables. The units currently involved includeIFC's EnvironmentalGroup, IFC's Infrastructure,GeneralManufacturing, andAgribusiness Departmentsthe six Regional energyunits inIBRD/IDA,the Prototype CarbonFundandother carbonfinance activities in IBRD/IDA and IFC, the Energy Sector ManagementAssistance Program (ESMAP), and specialinitiatives andprograms in Asia andAfkica. These units work closely with agencies outside the WBG, such as the GlobalEnvironment Facility (GEF). A highdegree ofcoordination is providedby devicessuchas the Energy andMiningSectorBoardthat hasmembershipfrom across the WBG andthejoint productionofthe WBG energy stratem. 43 - _______________ _____-- - _____ -- .____ - BankGrouphas succeededinmovingthe extractive industry sector onto a sustainable development paththat contributes to poverty alleviation dCES). The advisory groupwouldbemadeupof bepresentativesfrom governments, industry, andcivil society. is group would provide input andperspectives on specific E1 and would help identifyandpromote appropriate best ractice. Contacts anddiscussions about progress couldcontinue with stakeholders inthe interimperiod. Inaddition, in 1 number of areas the WBG will continue to work with takeholders to advance issues. 44 EXTRACTIVEINDUSTRIESAND SUSTAINABLEDEVELOPMENT: AN EVALUATION THEWORLD BANKGROUP'S OF EXPERIENCE (REPORT ONTHE INDEPENDENT EVALUATIONS OED/OEG/OEU) BY WORLDBANKGROUPMANAGEMENT RESPONSE SEPTEMBER 17,2004 CONTENTS I.Introduction ................................................................................................................................. 1 I1. OED/OEG/OEU Findings.......................................................................................................... 1 111. Management Comments........................................................................................................... 2 A. World Bank Group's Strategy........................................................................................... 3 B. Project Implementation Issues........................................................................................... 6 7 IV. Conclusions .............................................................................................................................. C. Partnershipsfor Wider Reach............................................................................................ 8 10 A. Recommendationsofthe Overview Report............................................................................. Annex ............................................................................................................................................ 10 B. Recommendationsofthe OED EvaluationReport.................................................................. 14 C. Recommendationsof the OEG Evaluation Report.................................................................. 18 D. Recommendationsofthe OEUEvaluationReport.................................................................. 24 ABBREVIATIONS AND ACRONYMS AAA Analytic and advisory activities AFTPS Africa Region Private Sector Unit ASM Artisanal and small-scale mining BTC Baku-Tbilisi-Ceyhan PipelineProject CAO Compliance Advisor/Ombudsman CAS Country Assistance Strategy co2 Carbon dioxide CASM Communities and small-scale mining CES IFC Environmental and Social Department COC IBRD/IDA/IFC Oil, Gas, Miningand Chemicals Department CODE Committee on Development Effectiveness DFID Department for InternationalDevelopment E1 Extractive industries EIR Extractive IndustriesReview EITI Extractive Industries Transparency Initiative ENH EmpresaNacional de Hidrocarbonetos FY Fiscalyear GGFR Global Gas FlaringReductionInitiative GHG Greenhouse gas HGA Host government agreement HIPC Heavily Indebted Poor Country HIV/ATDS Human immunodeficiency virudacquired immune deficiency syndrome IBRD InternationalBank for Reconstruction and Development I C M M International Council on Miningand Metals IDA International DevelopmentAssociation IEA International Energy Agency TFC International Finance Corporation IGA Inter-governmentagreement IMF International Monetary Fund IUCN World Conservation Union LICUS Low-income countries under stress MDGs MillenniumDevelopment Goals MIGA Multilateral InvestmentGuarantee Agency MMSD Mining, mineralsandsustainable development NGO Nongovernmental organization OECD Organisationfor Economic Co-operation and Development OED Operations Evaluation Department OEG Operations Evaluation Group OEU Operational EvaluationUnit OP Operational Policy PPAH Pollution Preventionand Abatement Handbook PRSP Poverty Reduction Strategy Paper SAL Structural adjustment loan SECAL Sectoral adjustment loan SEED SoutheastEurope Enterprise Development SME Small and medium enterprises TA Technical assistance UJV Unincorporatedjoint venture UN UnitedNations WBG World Bank Group DRAFTWORLDBANKGROUP MANAGEMENT RESPONSETO THE JOINTOED/OEG/OEUEVALUATION I.INTRODUCTION 1. This paper presents the response `of the Managements of the World Bank, IFC, and MIGA to a four-volume evaluation of the World Bank Group's (WBG's) activities in the extractive industries (EI>--oil, gas, and mining-by their respective independent evaluation units, the Operations Evaluation Department, Operations Evaluation Group, and Operations Evaluation Unit (OED, OEG, and OEU).' The evaluation was completed inJune 2003, and was considered at a meeting o f the Committee on Development Effectiveness (CODE) on July 9, 2003. At that meeting, Executive Directors agreed that Management should delay its response to the evaluation pending the receipt of the report of an independent Extractive Industries Review (EIR) consultation. The EIRreport has now been received and a draft Management Response to ithas beenprepared. 2. A Thorough and Timely Review. Management welcomes the joint evaluation report. It provides a thoughtful and thorough review o f the WBG's activities in EI. A particular contribution ofthe evaluation was its careful assessment o fthe impact o f WBG activities through a review of a wide range o f IBRDIIDA, IFC, and MIGA projects, which included country and project visits in many cases. The report makes an important contribution to understanding the development issues that are key for the WBG's activities in the sector, provides a valuable reference source, and offers a comprehensive set o f recommendations that can help guide future WBG activities in EI. It is especially timely because attaining the Millennium Development Goals (MDGs) in the poorest countries is a pressing challenge that will require a substantial commitment o f resources by the international community. In many developing countries, especially those in sub-Saharan Africa, well-managed development o f natural resource endowments can make a vital contribution toward reducingpoverty andattaining the MDGs. Ir. OED/OEG/OEU FINDINGS 3. The joint evaluation report shows that, on balance, WBG activities inthe E1sector have added value and have contributed to the development o f the countries concerned. Indeed, E1 projects have performed at least as well as projects in other sectors: nearly 80 percent of IBRD/IDA's E1 projects have been at least moderately satisfactory. IFC's and MIGA's operations in support of private sector activities in E1were as successful as other operations in their development outcome and financial performance dimensions, despite the fact that E1 investments were typically in more difficult country environments. Against this background, OED/OEG/OEU's independent evaluation lays out specific areas for attention and provides important perspectives on key issues for each institution and for the WBG as a whole with regard to its support for E1development. I Volume Iis the overall summary of ajoint OED/OEG/OEUsector review of the World Bank Group's activities; Volume I1 is OED's review of the Bank's activities; Volume 111i s OEG's review of IFC's activities; and Volume IV i s OEU's review of MIGA's activities. 4. Summary ofKey Messages. Management has noted the following key messages from OED/OEG/OEU's independentevaluation: Extractive industries have contributed to sustainable development when projects met appropriate economic and environmental criteria. The private sector is usually the most appropriate vehicle for new investment. The WBG's support for E1projects has generally been effective. The WBGhas addedvalue inthe environmental and social aspects ofits projects. The WBG social and environmental policies and experience with their implementation have beenuseful to others and have helpedset industry standards. e The WBG should remain engagedacross the whole of the E1sector, insupport both of governments and ofprivate sector investment. Ina number of important areas the WBG canimprove its performance and helpensure that its E1activities make a more effective contribution to sustainabledevelopment. 5. Areas of Overlapwith EIR. As was expected, the EIR covered many o fthe issues raised by OED/OEG/OEU, although with different emphases. Notably, the EIR is more broad-ranging inits coverage of humanrights and governance issues and global environmental concerns. The Management Response to the EIR thus complements the Management comments presented below and provides a wider context for the WBG's strategy. 111. MANAGEMENT COMMENTS 6. This section sets out Management comments on the WBG's strategy, project implementation issues, and approach to partnershipswith sector and project stakeholders-the three broad categories of recommendations in the OED/OEG/OEU evaluation report. Management broadly accepts the recommendations of the report in these areas and has already begun moving to implement them. Complementing the comments in this section, the Annex provides detailed responses to the specific recommendations of the overall report and of the individual OED, OEG, and OEU components. 7. Other Work Under Way. In some cases, the precise nature o f the ultimate WBG responsewill dependon the outcomes o f other processesnow under way, such as IFC's revision of its safeguard policies and guidelines, and its review of its disclosure policy. In other areas, such as the recommendation that the WBG should give increased attention to the human rights dimensions of activities benefiting from its support, Management proposes to wait for the outcomes of ongoing IBRD/IDA and IFC reviews o f this issue. However, in the case of EI- specific issues such as, for example, use of security forces to protect private E1project sites, Management proposesto move now to establish appropriate WBG requirements. 2 A. World Bank Group's Strategy 8. The OED/OEG/OEU evaluation, the EIR consultation process and reports, and other recent documents,* constitute a major body of work that reviews trends, issues, and the role of the WBG inthe E1sector and provides the foundation for the WBG's strategy inthe sector. The OED/OEG/OEU evaluation, inparticular, emphasizes that the WBG should take a broader, more integrated approach to its activities inE1that should (a) address the ultimate impacts of projects in terms of how the revenues from projects are used for poverty reduction and economic and social development; (b) ensure that Country Assistance Strategies (CASs) for resource-rich countries explicitly address the sector's economywide linkages and focus on policy and institutional capacity development; and (c) continue to support private sector development and environmental sustainability. Across all of these activities, OED/OEG/OEU recommends that WBG involvement should be guided by governancecapacity at the sector andnational levels. 9. Sector Contribution to Development Goals and WBG Role. For many developing countries, especially the poorest countries that risk failing to reach the MDGs, the E1 are a valuable asset that can and should generate some of the resources that are urgently needed to spur poverty reductionand support economic and social development. Because of the important promise that EIs hold for the economic and social development of many poor countries and because each o f the WBG's constituent institutions (IBRD/IDA, IFC, and MIGA) can add substantial value in this process, all of the WBG institutions will aim to remain engaged in E1 development by providing financing, technical assistance, and analytic and policy advice inline with their respective mandates and specializations. As developing countries succeedinreducing poverty, their people will increase their consumption of goods and services that are produced with E1inputs, enjoying greater warmth, light, and mobility because of their access to modern sources of energy. 10. Sector Development Vision Based on Private Sector Financing. In most country circumstances, the appropriate sector development model will continue to be one based mainly on private enterprises, in which all or most investments are financed by private investors and projects operate within an appropriate framework of government oversight to ensure maximum contribution to the sustainable development of affected communities and the country. However, the WBG will support Overall levels of WBG financing are likely to be broadly in line with those of recent years, that have accounted for less than 5 percent of total WBG financing and 3 percent of investments in E1in developing countries. The WBG can and should help advance improved industrywideapproaches to environmental and social practice, making an impact well beyond the modest investments that benefit from the WBG's support. To enhance its effectiveness in this regard, the WBG will leverage its impact by establishing partnershipswith stakeholdersand supporting demonstration projects that test new standards and approaches. 11. Emphases in WBGActivities. Because inmost countries much of the investmentfor E1 development can be mobilized from the private sector, IBRD/IDA's emphasis will be on helping governments create appropriate policy frameworks and build capacity for improved sector management. Financing of public sector extractive industry investments i s likely to remain rare. In IFC and MIGA, support for private sector investment will focus on local, regional, and See Background Paper - World Bank Group Activities in Extractive industries, Oil, Gas, Mining and Chemicals Department, World BanWIFC, August 2001. This paper and other documents relevant to the WBG strategy are availableat ww\l..worldbank.orcr/opmc. 3 smaller companies (including service companies), gas, and local energy supplyprojects. Support for larger projects will be concentrated where WBG involvement can make a significant contribution to sustainability. Inall of its operations, the WBG will work with project sponsors to help encourage and facilitate broader and more sustainable development impacts at the community level. 12. An Integrated Approach. Management agrees that the WBG needs to take an integrated view of its activities in EI. This will require as a startingpoint that, in all the projects that the WBG supports, Management will always consider their ultimate impact on communities, the environment, and the macro economy. Management will exercise selectivity inthis regard: for each project for which WBG support i s proposed, there should be a strong case for WBG involvement and a demonstrable value-added in terms of enhanced sustainable impact. In addition, whenever possible, the WBG will seek to actively engage with countries to help them address their E1issues, even whenthe WBG is not engagedinE1specifically. Management also agrees that for all its activities, governance issues and risks need to be taken into account during project design and appraisal. 13. Criteria for Engagement. The overriding objective of WBG engagement in E1 is to promote poverty reduction through sustainable development. IBRD/IDA, IFC, and MIGA will refocus on this objective in their work on project design, appraisal, supervision, and reporting. Inselecting and implementing projects, the WBG will be guided by its safeguard policies and guidelines, goodpractice approaches, and its bestjudgment. While limitingWBG support for E1 development would not serve the interests of WBG clients, the design and implementation of projects in E1need to be fully informed by the national, local, and sector governance risks. The assessments o f these risks and, where appropriate, measures to address them will be an integral part ofthe criteriathe WBGwill use to determine the extent andform of its involvement. 14. Focus on Governanceat the CountryLevel. As detailed inthe Annex, Management will sharpen its focus on governance issues and risks in countries that are heavily dependent on EI. Inparticular, CASs for such countries should identify and consider how best to addresskey E1 issues, including related governance issues, and should also provide an overall framework for any WBG activities in the E1sector. Management's proposed approach is to adopt a two-tier classification o f countries to recognize differences in terms of resource dependency and focus attention on the most resource-dependentcountries where improvement in governance promises to have the largest developmentimpact3 15. Mitigation of Governance Risks. In large projects, the WBG will require that specific measures be put in place to address the risks that revenues will not be well used. For smaller projects, WBG's appraisal and decision processes will evaluate and report on the governance risks to projects; ifthey are high and cannot be adequately mitigated, the WBG will not support Resource-rich countries are those in which EIs account for, or are expected soon to account for, more than 50 percent of government revenues and potentially include, for example: Algeria, Angola, Azerbaijan, Botswana, Chad, Congo (R), Congo (DRC), Equatorial Guinea, Gabon, Iran, Iraq, Kazakhstan, Libya, Nigeria, Oman, Syria, Sao Tome, Sudan, Timor- Leste, Turkmenistan, Venezuela, and Yemen. Countries with substantial resources are those inwhich extractive industries account for, or are expected soon to account for, 30 to 50 percent of fiscal revenues or exports and includepotentially, for example: Bolivia, Cameroon, Central African Republic, Chile, Colombia, Ecuador, Egypt, Ghana, Guinea, Guyana, Indonesia, Jamaica, Jordan, Kyrgyz Republic, Mali, Malaysia, Mauritania, Mexico, Mongolia, Mozambique, Namibia, Niger, Papua New Guinea. Peru, Russia, Sierra Leone, South Africa, Suriname, Tanzania, Togo, Trinidad and Tobago, Ukraine, Uzbekistan, and Zambia. The usefulnessof the two-tier approach and relevanceof the specific thresholdswill be reviewed in light of implementation experience; the corresponding country groupings will be periodically updated as necessary. 4 the project. Governance risks are more likely to be acceptable inE1projects that generate small fiscal revenues. In some instances, WBG support will be warranted even in weak governance environments, ifprojects are expectedto generatereal benefits. 16. Sequencing of WBGAssktance. OED/OEG/OEU raised concerns about the sequencing of governance capacity building and emphasized the importance o f addressing capacity weaknesses at the sector and national levels. While Management agrees that governance capacity building, which is a priority for the WBG, can be an uncertain and lengthy process for which the risks need to be weighed and mitigated to the extent possible, the WBG also needs to be able to makejudgments basedon the specific circumstancesofthe country andthe project, as well as likely development outcomes with and without its engagement. This judgment will be guided by analysis of a country's economic policies and institutions, evaluation of quantitative and qualitative indicators of governancecapacity, and assessment of the performance of ongoing WBG and IMF-supportedprograms. When expectations about project outcomes and decisions about WBG support depend on such ajudgment, Management will lay out clearly the rationale for its proposed approach. 17. ResourceImplications. As was stated above, the overall level of WBG activities inE1is not expected to change materially from current levels; new financing commitments in support of projects should remaininline withrecent experience andwill be concentrated inIFC and MIGA. However, the focus of activities will shift in accordance with the priorities described inpara. 11 and inresponseto changes incountry demandsreflected innewCASs, which set out the amount of financing commitments to a country inview of competing alternatives and priorities for WBG engagement. As CASs for resource-dependentcountries focus increasingly on E1issues, WBG activities in E1could increase-especially analytic and advisory services, economic and sector work, and TA operations to address, for example, management o f E1 revenues and related governance issues. Such activities will be coordinated with (or often directly integrated into) related initiatives in support of improved economic policymaking and strengthened public financial accountability and management. 18. Shvt Toward Environmental and Social Development Expertise. As IFC and MIGA have increased their focus on environmental and social issues in recent years, there has been a significant increase in staff with skills in those areas. In IBRDADA, the number of environmental and social staff working on policy and technical issues has also increased in recent years. The major shifts have largely occurred, but stronger focus on ensuring sustainable impacts will require appropriate resources for the WBG project teams in particular E1projects. Project teams will often require earlier and more extended involvement of environmental and social specialists to ensure implementation of safeguard policies; resources for enhanced disclosure and community consultations; and resources for appraising and supervising value- added activities to increase local benefits and participation in projects. Whether some or all of the additional costs can be recovered from clients will depend on the institution and the project, Management will ensure that project budgetsare basedon an evaluation o f these factors and will make realistic allowances for the costs of staff involved in more detailed preparations and supervision. 5 B. ProjectImplementationIssues 19. OED/OEG/OEU offer challenging recommendations to enhance the development impact of WBG operations insupport of E1development. Becausethe vast majority of recent andfuture projects are or will be supported by IFC and MIGA, in line with the WBG's strategic emphasis on supporting private sector development, the following sections are concerned mostly with recent developments and ongoing initiatives inIFC and MIGA. 20. Screening and Classification of Projects. Management is aware that the implementation of WBG projects could be improved by carrying out more effective screening and classification of projects, involving environmentalists and social specialists throughout the project life, enhancing the reporting of results from projects, and evaluating the sharing of benefits from projects more explicitly. OED's finding that some IBRD/IDA projects were incorrectly classified and consequently inappropriately supervised reflects, inpart, the process of significant change inthe WBG's adoption and implementation o f safeguardpolicies and guidelines over the period covered by the evaluation. With the lessons of experience and proposed revision of guidelines, these problems are being addressed. The close involvement of environmental and social specialists in E1projects through the project life cycle is a key part of WBG engagement in these projects. Management's clear objective will be to ensure that the excellent levels of compliance notedby OEG insome areas ofthe IFC's E1activities become the norm for all WBG activities inthe sector. 21. Growing Contributionfrom Environmental and Social Specialists in IFC and MIGA. InIFC and MIGA, which account for most of the new E1investment projects financed by the WBG, the resourcesdevoted to environmental andsocial due diligence andadditional work with clients have increased considerably over the last 10 years. Inboth IFC and MIGA, Management i s taking steps to ensure that environmental and social specialists are more productively integrated with investment staff. While maintaining an independent quality assurance hction, IFC has also begun to mainstream environmental and social responsibility so that investment departments see it as a core part o f their activities and responsibilities. In May 2004, MIGA added environmental and social staff to its risk management staff, so that a more holistic view willnowbepossible inassessingprojects. 22. Sustainability Initiatives in IFC. IFC's overall corporate sustainability initiative has increased staffs focus on sustainability issues. Most E1 sector staff have now taken part in specialized sustainability training to enhance their awareness o f issues and best practice. The contribution that projects can make in the environmental and social arenas, including through enhanced local development, has become a key component o f IFC's business in EI. Enhanced analysis of the benefit sharing, which will be part of project design, will further increase this focus and will be applied in IBRD/IDA and MIGA as well. However, the WBG will need to carefully balance attention to social and environmental dimensions against the extra burdensuch attention imposes on developing country clients and the additional supervision and appraisal costs it entails. IFC's E1activities already account for a disproportionate share of IFC's budget for environmental and social specialists. E1operations are also intensive users of resources for other development impact-enhancing activities, such as small and medium enterprise and corporate governance initiatives. 23. Recent Changes in MIGA. Management underscores the important changes that have taken place in MIGA since May 1999, when the Board approved MIGA's own specific 6 environmental assessment and disclosure policies and procedures, and May 2002, when MIGA adopted its own interimissue-specific safeguardpolicies. Although MIGA's clients have found these safeguard policies to be helpful, Managementrecognizes that further improvements can be made as WBG views evolve. 24. Revision and Updating of MIGA Safeguard Policies. Management has made a serious effort inthe past five years to address a range of widely acknowledged difficulties indetermining how to apply safeguard policies to private sector investors and what is meant by compliance with safeguard policies (see, for example, recent CAO reports on the ~ubject).~Differences among experienced professionals ininterpreting and implementing safeguardpolicies canpose a serious challenge, one that is of particular concern to MIGA because of the unique legal and financial implications of denying a claim or canceling a guarantee for noncompliance. MIGA staff will work with IFC staff on updatingIFC's safeguardpolicies, andwill take the opportunity to clarify safeguard policy applicability and implementation issues in MIGA-supportedoperations. Once IFC's updatingprocess i s completed, MIGA will revise and update its own safeguard policies in an equivalent manner, in line with the commitment MIGA Management made to the Board in May 2002. C. Partnershipsfor Wider Reach 25. OED/OEG/OEU recommended a number of ways to enhance the impact of WBG activities on industrywide practice, well beyond the small number of operations that the WBG supports directly. Management agrees with OED/OEG/OEU recommendations in this regard. The WBG will seek to use its international convening power more effectively by making its safeguard policies and guidelines more relevant and accessible, promoting the disclosure of fiscal revenues, developing and monitoring indicators of sustainable development with other stakeholders, and increasing local community participation in projects through meaningful consultation throughout project life. 26. Setting Industry Standards in Partnership with Others. A number of important initiatives are under way that will help enhance WBG's impact on industry practice. First, IFC has begunthe two-year process of revising its safeguard policies and guidelines, and is giving priority to EI-related issues. For example, revised Precious Minerals Mining Guidelines were available in draft for public comment from July 2004. The updated safeguards will be key for sustaining the catalytic role that IFC has assumed in its important partnershipwith the Equator Banks. Second, IBRD/IDA'sproposedrevised policy coveringIndigenous Peoples (OP 4.10) is expected to be considered by its Board by end 2004, and will contain provisions to help ensure that Indigenous Peoples benefit from development. Finally, the WBG will work inpartnerships with governments, industry and civil society to advance best practice and contribute to the sustainable impact o f ET development more broadly ininitiatives such as the Global Gas Flaring Reduction Partnership, which set voluntary global standardsfor addressing gas flaring. 27. Growing Emphasis on Revenue Transparency. Transparency about government revenues and expenditures generally is an important dimension o f the macroeconomic policy dialogue between borrowing governments and IBRDIIDA; in this respect, a priority area for IBRD/IDAassistanceis to help increase government capacity and accountability. Inthe area of See A Review of IFC's Safeguard Policies, CAO, January 2003, Insuring Responsible Investment?, CAO, December 2002, and other reportsaccessibleat: wwwxao-ombudsman.org 7 transparency about E1revenue, the WBG has joined with the UK Department for International Development (DflD) and other partners to support the Extractive Industries Transparency Initiative (EITI), which aims to promote E1revenue transparency at the country level. At the project level, the WBG will now require disclosure o f E1revenues and the key terms o f relevant contracts for all large projects that benefit from its support; for smaller projects, intwo years the WBG will require disclosure of material EI-related payments to governments except when there is a compelling reasonto not do so. 28. Reporting on Outcomes. Management recognizes the need for enhanced reporting on the outcomes o f WBG activities inE1and its rationale for engagement. InIFC's ongoing review o f its disclosure policy, Management will establish new requirements for investors to make more information about projects available to communities, will enhance the reporting on IFC activities inthe sector, andprovide for greater disclosure o fits rationalefor supporting newE1projects. As a part o f this process, IBRD/IDA and IFC will continue to work with other stakeholders to develop meaningful, consistent indicators o f the contribution o f E1to sustainable development. 29. Focus on Community Involvement. Appropriate consultation with people who will be affected by projects is a core WBG requirement for sustainable development, especially for E1 projects that take place in remote areas and may have relatively large effects on local communities. The WBG proposes to adopt use o f a process o f free, prior and informed consultation with affected communities that leads to broad acceptance by the affected community o f the project as a condition for its involvement and will work with investors to promote best practice inthis respect, and to generally enhance the involvement o f and benefits to communities inthe context o f E1developments that benefit from WBG support. IV. CONCLUSIONS 30. Altogether, the WBG has embarked upon a fundamental change in its approach to E1 investments. Its past mode o f operation presumed that expected overall potential benefits to countries (energy resource development and revenue generation) justified new investments. In its new mode o f operation, concerns about the ultimate developmental impacts, including the management o f revenues generated by E1 projects and the specific, realizable benefits to communities, are regarded as the starting point for discussions o f WBG involvement. Inmoving forward, Management will continue to encourage coordination among activities in IBRD/IDA, IFC, and MIGA, with each institution serving its respective clients, pursuing objectives in line with its mandate, and using its own business models and processes. Coordination among the three institutions has already benefited from preparation o f this joint Management Response and will continue to be facilitated by the joint IBRD/IDA/IFC Oil, Gas, Mining and Chemicals Department which ensures strong links between IBRD/IDA and IFC, and by the Energy and Mining Sector Board, which ensures links to Regional and country programs and MIGA. At the country level, enhanced attention to E1issues in the CAS will serve to strengthen coordination with the WBG's country assistance programs. 8 31. Tracking Progress in Implementation of the New Approach. Management expects to measure implementation of the comprehensive set of reforms implied by the new approach as follows: Short-Term Indicators-within one year a. New guidance and processes that address EI-specific safeguard issues such as mine closure/decommissioning; use of security forces; monitoring and disclosure of environmental, social, and economic impacts; transparency requirements for new investments; gas flaring; acid rock drainage; and HIV/AIDS. b. New guidelines and processes for disclosure of information about WBG-supported E1 projects and about activities inEI, including development of sustainability indicators. c. Development of a database for all IFC projects that indicates position regarding all key sustainability indicators (including mine closure/decommissioning plans, safeguard compliance, gas flaring, and use of security forces). d. Clearer guidelines for WBG environmental categorization of projects. e. CASs for resource-rich countries and countries with significant resources start to address relevant EI-relatedissues. Three-Year Indicators f. The extent to which new CASs have dealt with extractive industry issues inresource-rich countries andcountries with significant resources. g. Effective implementation of partnership initiatives (including GGFR, CASM, and EITI) involving civil society, industry, and govemments, and outcomes of these partnerships in terms of contributingto the development of sector best practice. h. Revenue transparency improvement through effective implementation of programs in participatingcountries underthe EITI. i. Support for sustainable new private sector E1investment at average levels broadly comparable to those o fthe recent past. j. Continuing levels of IBRD/IDA financing inline with recent average with a focus on: i.Oil and gas: environmental management, TA (especially for transparency, revenue management), and gas industrydevelopment. ii.Mining:coalsectorrestructuring,TA,andminingsectorpolicyreform. iii.Capacitybuildingforsocialandenvironmentalmonitoringinbothsectors 32. Management proposes to report on progress on its activities in E1every year. It also proposes to set up a working level advisory group with representative of governments, industry, civil society, and other parts of the WBG to provide inputs and perspectives on the WBG's activities inEI. 9 Annex Recommendationsof the Joint OED/OEG/OEUEvaluationand ManagementResponseMatrix A. RECOMMENDATIONS OFTHE OVERVIEW REPORT Recommendationof the Overview Reportof ManagementResponse the Joint OED/OEG/OEU Evaluation The WBG needs to desim and implement a Management accepts this recommendation. The overall sectoral strategy that closely integrates resource approach to E1activities, as set out inthis Management Response extraction with sustainable development through and inresponsesto individual recommendations, provides a the effective management o f E1revenues in framework for the WBG's activities inE1that gives a central support o f developmental priorities and the place to promotion o f good governance and increased reliable mitigation o f adverse environmental and transparency. Management has identified indicators o f social impacts. Where macro and sectoral implementation progress for its strategy, and it will monitor governance are weak, the WBG's assistance them. Managementwill strengthen its efforts to promote use of should focus on strengthening governance. In fiscal revenues for development priorities andto mitigate risks such cases, the WBG should carefully assess due to poor governance. The ultimate objectives are sustainable andreport onthe risks that E1fiscal revenues impacts at the local, national and global levels. The appraisal may not be used for development priorities. The reports for new E1projects incountries with weak governance WBG should not support significant sector will clearly assessthe risksthat E1fiscal revenues may not be expansion unless it can adequately mitigate usedfor development priorities. See also responsesto OED l a these risks. Where macro governance i s sound andOEG lb. Overall, the levelo factivities ofthe three but sectoral governance is weak, the WBG institutions inE1is not expected to increase materially and will should focus on improving sectoral governance, not demand additional resources. Resources are expected to and should only support the sector in continue to be allocated to E1activities through the country and conjunction with adequate provisions to regional resource allocation processes on the basis o f country and overcome sectoral governance weaknesses. regional priorities. Trust funds andpartnershipswill continue to be an important source of additional resources for E1activities, especially for programs outside the scope o f single-country _- , - Droaans and sDecific Droiects. Address El Issues in CAS$ c__- ---I__ For all resource-rich countries the WBG should -I_ Management accepts this recommendation and has developed a explicitly address extractive industries inthe two-tiered approach to improvingthe focus o f CASs on relevant CASs. The CAS should explicitly discuss the E1issues. This approach uses ahigher cut offfor resource-rich sector's current and potential contribution to countries (more than 50 percent o f government revenues derived sustainable development (for example, the from EI) than that used by the Evaluation (15% o fexports) so as importance o f government revenues, their to exclude relatively less EI-dependent butto include non- management, distribution, and use for exporting countries. With limited staff and country resources and development priorities) andreference the competing priorities, the WBG will thus focus on the most underlying governance assessment.This should resource-dependent countries andon countries where it can have guide future project design, facilitate monitoring the most impact. The proposed approach already targets more and evaluation, and provide an agreed than50 countries (with substantial overlap with the evaluation framework for WBG-wide coordination and list). CASs for resource-rich countries will be expectedto collaboration inthe E1sector. The different address relevant E1issues andrelated governance issues. In agencies o f the WBG should routinely work countries with substantial resources (where 30-50 percent o f together to enhance the development impacts o f government revenues or exports are from EI), the CAS will be E1projects, for example inthe form of public- expected to identify key E1sector issues andwhether and how private partnershipswith respect to community IBRD/IDA will be involved inaddressingthem. This doesnot development programs. rule out CAS discussion on E1issues inother countries where they are important, and the thresholds and guidelines will be reviewed inthe light o f experience. Where possible, IBRDIIDA, IFC, and MIGA will work together as recommended by OED/OEG/OEU. Moreover, IBRD/IDA will encourage resource- rich countries and countries with substantial resources to address relevant E1issues intheir own overall development strategies, such as PRSPs. The WBG institutions will work pro-actively in 10 Recommendation of the Overview Report of Management Response the Joint OED/OEG/OEUEvaluation the E1sector to identify opportunities for cooperation. COC will continue effective implementation o fmajor partnership initiatives such as the Gas FlaringReduction Partnership, ._ ----.. Governance Promote Governance Improvements: The Bank vlanagementaccepts this recommendation. Where the WBG is should compensate for &e lower level o f lot involved infinancing operations but where E1issues are lending that may be appropriate for resource- mportant and where governance is weak, the WBG will aim to rich countries with weak macro and sectoral levote greater resourcesto technical assistance and analytic and governance, by devoting greater management tdvisory activities that can, for example, help countries manage attention and administrative budget for advisory heir resource industriesmore effectively, including addressing and analytical activities aimedat improvingthe ,elmant broader policy, institutional, and governance issues. The policy, institutional, and governance framework :AS for resource-rich countries with weak macro and sectoral for EI. This would enable the Bank to establish )erformance will identifythe needs for TA inthis area, andwill and maintain continuity o f engagement and liscuss whether and how IBRD/IDA should be involved in facilitate responding quickly to opportunities for neeting these needs. Implementation o fthis recommendation may assistancewhen they arise. ,equire additional IBRD/IDA administrative budget resources for :ertain countries. Including its activities relatingto transparency, wer the next three years, Management will aim to increase the eve1o f nonlending activities aimed at policy improvements - :ompared to the past three. Support Private Sector Developnient and I- EnvirqiimentalSustainability -- ~ Inall countries, the WorldBank Group should Management accepts this recommendation. There remains an continue its support to close uneconomic mines, important role for IBRD/IDAto assist governments to restructurt reform and privatize state-owned enterprises, their miningand coal industries, including helping to close andmitigate pre-existing environmental and uneconomic coal mines andto mitigate social and environmental social problems. problems. Much o fthe world's oil industry is government-ownec and, where appropriate, IBRD/IDAwill consider supporting government efforts to improve the effectiveness o fthese operations, where governments have ruled out privatization for _ _ _ - ___ -- . __ .____-_ ___-__.--_I_ the foreseeable future. Where appropriate, the World BankGroup IBRD/IDA will continueto work with others, particularly ~ should help integrate artisanal and small-scale through CASM, to develop effective approaches and besi mining (ASM) with the formal sector and practices. Given country differences, the CAS for countries internalize their environmental and social where ASM is important will be expected to consider approache! impacts, while at the same time creating that are integratedeffectively into overall country andpoverty alternative employment opportunities and reduction strategies. Clearly an important component o f any supporting the consolidation o f A S M activities overall approach is to create better opportunities for those for greater efficiencies and economies o f scale. involved inother parts o fthe economy. COC will aim over a three-year periodto develop three or more operations that aim to integrate A S M into the broader economy andor improve its .- Iniprave Project Screening and--.Monitoring -- , --- social, environmentakeconomic outcomes. --.- -~ - The World Bank Group should provide clearer WBG will provide updatedguidance for the categorizationof ..--a- ~ andmore consistent guidance for the projects concerned with EI. This guidance will addressproject categorization o f projects, the identification o f screening and the use o f appropriate assessment instruments. applicable safeguards at the initial project Sectoral approaches will be used for periodic reporting and screening, the appropriate scope and nature o f evaluation o f safeguard aspects o f E1projects. This information the EA instruments, andthe reporting and will be disseminated through periodic training activities for staff evaluation o f safeguards implementation. This from the WBG, clients, and other parties. needsto be followed up through the entire implementation framework, from good practice guidelines to appropriate monitoring and training. 11 -- - SpecialistsThroughout involve The World Bank Group should provide This is agreedandis dealt with more specifically inthe responses ~~ 2b adequate resources and incentives for the to recommendations of OED (2b), OEG (2a, 2b) and OEU(1b, participation o f qualified environmental and 2a, and 3c) below. social specialists at the preparation, appraisal and supervision of all projects that are likelyto have adverse impacts. This will ensurethat such impacts are adequately addressedthroughthe upstream design of appropriate mitigation strategies or project alternatives, as well as through the retrofit o ftimely remediation measures should unexpected impacts materialize during project implementation. Enhance Reporting of Resu1t.s The Bank should strengthen reporting o f its Management accepts this recommendation, as is detailed inthe results by ensuring that project completion responseto the recommendations o f OED (2c) and OEG (2c). As reports include an ex post economic rate o f noted inresponsesto the OEUrecommendations (see la, 2a, and return or net present value or, where that i s not 2d below), MIGA i s taking steps to implement more feasible, a cost effectiveness analysis to standardized and timely reporting mechanisms on safeguard determine whether the project represented the compliance and development outcomes, especially o f Category least-cost solutionto attain its objectives. IFC A projects. Management will ensure that an "activity completion should develop and use a reporting template for summary" or equivalent for all significant nonlending E1 environmental and socio-economic activities inIBRD/IDA,IFC, and MIGA i s prepared. sustainability indicators, buildingon industry initiatives. MIGA needsto adopt more standardized and timely reporting mechanisms on environmental and social safeguards compliance and ex post development outcomes. The WBG should prepare completion reports for every significant non-lendinglguarantee - ., __-- __I_-- 2d Management agrees that an analysis o f the distribution ofthe andduringsupervision, the WBG sh&ld benefits o f extractive industries developments should be part of systematically estimate the distribution o f the WBG's project evaluation and supervision work. The project benefits among different stakeholder appraisal report for E1projects will be expected to assess the groups (government at different levels, private sensitivity o f distribution to different assumptions about key companies, and local communities), evaluate its project variables. The extent o f discussions of benefit-sharing sensitivity to different scenarios, and discuss the with key stakeholder groups will need to be considered carefully acceptability ofbenefit-sharing with key inthe project andcountry context, giventherole ofgovemments stakeholder groups. (and sometimes constitutions) insettingthe distribution o fE1 revenues. UpdatePolicy Pramewurk- 3a Inconsultation with its stakeholders. the WBG Agreed. See responses to recommendations o f OED (3a), OEG should periodically adjust its policy kamework (3a), and OEU (3c) below. for extractive industries to ensure that it remains up-to-date with evolving industry practice. It should resolve remaining inconsistencies such as those between requirements for different mine types (such as funding for mine closure), onshore versus offshore oil projects, safety o f dams, and involuntary resettlement. It should address identified gaps such as those related to consultation and disclosure, community development, social issues o f mine closure, security, hazardous materials management, acid rock drainage, gas flaring, and transportation o f oil. Itshould also recognize the expanding 12 awareness of the human rights dimension o f WBG policies andprojects, and explore possible avenues for addressing the issues, especially where it lags industry bestpractice such as, for example, regardingsite security. I_--- 'remote Disclosure of Revenues froin El-- Management accepts this recommendation because increased ~~ The WBG should vigorously pursue country- and industry wide disclosure o f government transparency about resource revenues is an important step toward revenues from E1andrelatedcontractual better govemance andthe use o f resources inresource-rich arrangements (such as production sharing countries. IBRD/IDAis now actively supporting the EITI ledby agreements, concession and privatization terms). DfID, and inthis context, is working ina number o fpilot The Bank should work toward and support countries. Inaddition, the WBG will support other initiatives as disclosure o f E1revenues and their use in appropriate, andwill work for greater transparency o frevenues resource-rich countries. IFC and MIGA should and expenditures within its country programs. Inthe context of also strongly encourage (and consider requiring) new E1investment operations, WBG support will be conditional their private sector clients to publishtheir on transparency commitments by investors. Disclosure of payments to governments. payments to govemments will be required effective immediately for major projects and will be expected for all projects intwo years, when appropriate implementation modalities are expected to have beendeveloped andtested under the EITI andsimilar activities. Over the next three years, IBRD/IDAwill aim to complete five or more EITIpilots with countries and will aim to mainstream the approach to revenue transparency more broadly -- -- in the WBG. - [)evelop and Monitor Suslilinablky lndirators ____--_ Together with other stakeholders, the World ~ Management-accepts this recommendation. The WBG will work BankGroup should develop indicators of with stakeholders i o define appropriate sustainability indicators economic, social and environmental that can be usedto monitor and report on outcomes. OP 4.01 sustainability, establish baseline data, provide requires the collection o fbaseline data. IFC has recently for adequate monitoring over the life o fthe produced a good practice note (Addressingthe Social project, and report and evaluate the results Dimensions of Private Sector Projects)that provides guidance 01 during supervision and inproject completion collection o fbaseline data; a similar exercise i s planned for reports. The World Bank Group should also environmental data. These notes can also serve to guide encourage more independent outside IBRD/IDA and MIGA. The development of independent local monitoring, ideally using local capacity (that capacity for monitoring the impact o f E1projects is important. may have to be developed). Capacity buildingwithin governments is already a key objective of IBRDhDAactivities inthe sector. Development o f communitykivil society capacity can help with project monitoring and can oftenbe considered inthe project context. In the case of very large projects (such as inthe Chad-Cameroon pipeline or B T C pipeline projects), the creation o f independent monitoring groups may be practical and effective, and will be considered. Insome cases it may be appropriate to develop local capacity to play a role insuch forms o f oversight. Inaddition, se theresponsesto the recommendations ofOEG (2a) and(3c) helnw Jd The WBG should support enhanced community Management agrees with this recommendation. Enhanced consultation and participation throughout the community consultation and participation inE1projects is a key life cycle o f EI-projects. The WBG should assist area o f evolving best practice for the WBG. See the response to countries to increase involvement by local recommendation o f OEG (3d) for details. communities inE1decision-making processes, and ongoing consultation throughout the project life cycle, including closure. 13 B. RECOMMENDATIONS OEDEVALUATION OFTHE REPORT Recommendationof the OED Evaluation ManagementResponse The Bank.,together with other members o fthe Management accepts this recommendation. The overall - WBG needsto design and implement a sector approach to E1activities, as set out inthis Management strategy that closely integrates resource extraction Responseand inresponses to individualrecommendations, with sustainable development through the effective provides a framework for the WBG's activities inE1that gives management o fE1revenues insupport o f a central place to promotion o fgood governance and increased developmental priorities andthe reliable mitigation transparency. Management has identified indicators o f of adverse environmental and social impacts. implementationprogress for its strategy, and it will monitor Where macro and sectoral governance are weak, them. Management will strengthen its efforts to promote use o f the Bank's assistance should focus on strengthening fiscal revenues for development priorities and to mitigate risks macro and sectoral governance. Insuch cases, the dueto poor governance. The ultimate objectives are Bankshould carefully assess andreport onthe risks sustainable impacts at the local, national, and global levels. that fiscal revenues may not be used for The appraisal reports for new E1projects and relevant sector development priorities. The Bank should not reforms incountries with weak governance will clearly assess support significant sector expansion unless it can the risks that E1fiscal revenues may not be used for adequately mitigate these risks. Where macro development priorities. See also OEG lb. governance is sound but sectoral governance is weak, the Bank should focus on improving sectoral For all resource-rich countries the Bank should Management accepts this recommendation and has developed explicitly address extractive industries inthe CASs. a two-tiered approach to improving the focus o f CASs on The CAS should discuss the sector's economy wide relevant E1issues. This approach uses a higher cut off for linkages (such as the importance o f government resource-rich countries(more than 50 percent of government revenues, their management, and distribution) and revenues derived from EI)than that used by the evaluation reference the underlying governance assessment. (15% o f exports) so as to exclude relatively less EI-dependent This should guide future project design, facilitate but to include non-exporting countries. With limited staffand monitoring and evaluation, and provide an agreed country resources andcompeting priorities, the WBG will thus Framework for WBG-wide coordination and focus on the most resource-dependent countries and on collaboration inthe E1sector. countries where it canhave the most impact. The proposed approach already targets more than 50 countries (with substantial overlap with the evaluation list). CASs for resource-rich countries will be expected to addressrelevant E1 issues and related governance issues. Incountries with substantial resources (where 30-50 percent o f government revenues or exports are from EI), the CAS will be expected to identify key E1sector issues andto discuss whether andhow IBRD/IDAwill be involved in addressing them. This doesnot rule out CAS discussion o f E1issues inother countries where they are important, andthe thresholds and guidelines will be reviewed inthe lighto f experience. Where possible, IBRD/IDA,IFC, andMIGA will work together as recommendedby OED/OEG/OEU. Moreover, IBRD/IDAwill encourage resource-rich countries to addressrelevant E1issues intheir own overall development strategies, such as PRSPs. The WBG institutions will work proactively inthe E1sector to identify opportunities for cooperation, andto develop private- public partnerships. A good-practice note on E1issues will be prepared anddisseminated as Dart o fthe guidelines for CASs Promote Governance Improvements: The Bank Management accepts this recommendation. Where the WBG i s ;hould compensate for the lower level of lending not involved infinancing operations but where E1issues are hat may be appropriate for resource-rich countries important and where governance is weak, the WBG will aim tc with weak macro and sectoral governance by devote greater resources to technical assistanceand analytical levoting greater management attention and and advisory activities that can, for example, help countries 14 Recommendationof the OED Evaluation Management Response administrative budget for advisory andanalytical managetheir resource industries more effectively, including activities aimed at improvingthe policy, addressing relevant broader policy, institutional, and institutional, and governance framework for EL governance issues. The CAS for resource-rich countries with This would enable the Bankto establish and weak macro and sectoral performance will identify the needs maintain continuity o f engagement and facilitate a for TA inthis area, and will discuss whether andhow the quick response to opportunities for assistancewhen WBG should be involvedinmeetingtheseneeds. they arise. Implementation o fthis recommendation may require additional administrative budgetresources for certain countries. Over the next three years, Management will aim to increase the level o fnonlending activities aimed at policy improvements (including those relatedto revenue " - .- .-__.- _ - - . Support P r h t Sector Developnetit and ~ f?nyironmenfal SusteinFbilify Management acceptsthis recommendation, as there remains an ~~ Inall countries, the Bankshouldbeready to support the closure o f uneconomic mines, important role for IBRD/IDAto assist governments to privatization o f state-owned enterprises, and restructure their mining and coal industries, including helping mitigation o fpre-existing environmental and social to close uheconomic coal mines, and mitigating social and problems. environmental problems. Mucho fthe world's oil industry is in state hands and, where appropriate, the Management will consider whether IBRD/IDAshould become involved, for example, to help governments improve the effectiveness o f these operations, where governments have ruledout privatization for the foreseeable future. Where appropriate, the Bank should help integrate IBRDADA will continue to work with others,-particularly ~ ~ artisanal and small-scale mining (ASM) with the through CASM, to develop effective approachesand best formal sector and internalize their environmental practices. Given country differences, the CAS for countries and social impacts, while at the same time creating where ASM is important will be expected to consider alternative employment opportunities and approaches that are integratedeffectively into overall country supporting the consolidation o f ASM activities for and poverty reduction strategies. Clearly an important greater efficiencies and economies o f scale. component o f any overall approach is to create better opportunities for those involved inother parts o fthe economy. COC will aim over a three-year period to develop three or more operations that aim to integrate ASM into the broader economy andor improve its social, environmental, or ___I__.-- economic outcomes Improve U stream Pro ect Screeiiing . . The Bank should provide clearer and more IBRD/IDAwill provideupdatedguidance for the I_ consistent guidance for the categorization o f categorization o f sectoral adjustment and technical assistance sectoral adjustment and technical assistance projects concerned with EI.This guidance will address project projects, the identification o f applicable safeguards screening and the use o f appropriate assessmentinstruments. at the initial project screening, the appropriate Sectoral approaches will be used for periodic reporting and scope andnature of the EA instruments, and the evaluation o f safeguard aspects o f E1projects. This reporting and evaluation o f safeguards information will be disseminated through periodic training implementation. This needs to be followed up activities for staff from the Bank, clients, and other parties. through the entire implementation framework, from good practice guidelines to appropriate monitoring -., . c ..-.....- The Bankshould strengthen the implementation o f I s it agreed that project teams should have effective its safeguard policies by providing adequate participation o f environmental andsocial specialists at all resources for the participation o f qualified stages o fthe project process, particularly for projects likely to environmental and social specialists at the have adverse impacts. Project budgets will needto be set preparation, appraisal, and supervision o f all adequately to ensure this. projects that are likely to have adverse impacts. This will ensure that such impacts are adequately addressedthrough the upstream design o f appropriate mitigation strategies or project 15 Recommendation of the OED Evaluation Management Response alternatives, as well as through the retrofit o ftimely remediation measures should unexpected impacts materialize during project implementation. EnhanceHeportiitgof Results The Bank should strengthen the implementationo f Itis agreedthat project completionreports shouldprovide its completion reportingrequirements by (i) these quantitative estimates o f impacts wherever possible, and ensuring that project completion reports include the should state the reasonswhere this is not possible. An activity calculation o f an ex-post economic rate o freturn or completion summary should be prepared for every significant net present value or, where that is not feasible, a non-lending activity. cost-effectiveness analysis to determine whether the project represented the least-cost solution to attain its objectives; and (ii)preparingan activity completion summary for every significant non- - activity. lending ---- Kvaluate the Sharinx uf Benefits At appraisal andproject completion, the Bank Management agreesthat distribution ofthe benefits o f should systematically estimate the distribution o f extractive industries developments is important. The appraisal project benefits among differentstakeholder andproject completionreports for E1projects will be expected groups-government at different levels, private to assess the sensitivity o f distribution to different project companies, and local communities-evaluate its scenarios. The extent o fdiscussions o fbenefit-sharing with sensitivity to different scenarios, and discuss its key stakeholder groups will needto be considered carefully in acceptability with key stakeholder groups. the project and country context, giventhe role o f governments (and sometimes constitutions) insetting the distribution o f E1 revenues. See also the responseto OEG recommendation2d ."- below. U d a t e Policy FGmework Inconsultation with its stakeholders, the Bank Inthe context o fthe overall WBG approach to these issues, should periodically adjust its policy framework for Management will evaluate and help develop best practice extractive industries to ensurethat they remain up- approaches to EI-specific issues. Current opportunities include to-date with evolving industrypractice. It should the ongoing review o f IFC safeguard policies, the revision o f resolve remaining inconsistencies within the WBG the IBRD/IDAIndigenousPeoples policy, andthe and address identified gaps. It should also consideration o f approachesto human rights by IFC and recognizethe expanding awareness o f the human IBRDADA (where a Senior Adviser on humanrights has been rightsdimension o fBankpolicies andprojects, and appointed). explore possible avenues for addressing the issues, .especially where it lags industry best practice. Promote Disclosureof Revenuesfroin El The Bank should vigorously pursue country- and Management accepts this recommendationbecause increased ~~ ~ industry wide disclosure o f government revenues transparency about resource revenues is an important step from E1andrelated contractual arrangements (such towardbetter governance and the use ofresources inresource- as production sharingagreements, concession and rich countries. IBRDADA is now actively supporting the EITI privatization terms). It should work toward and ledby DfID, and inthis context, is working ina numbero f support disclosure o f E1revenues and their use in pilot countries. Inaddition, the WBG will support other resource-rich countries. initiatives as appropriate, andwill work for greater transparency o frevenues, expenditures, and contracts (where feasible and appropriate), within its country and sector programs. Notably, AAA such as public expenditure reviews and country financial accountability assessments, andrelated policy dialogue, will be the main vehicles for promoting transparency. Inthe context o f new E1investment operations, WBG support will be conditional on transparency commitments by investors. Disclosure o f paymentsto govemments will be requiredeffective immediately for major projects and will be expected for all projects intwo years, when appropriate implementation modalities are expected to have been developed andtested under the EITI and similar activities. Over the next three years, Management will aim to complete five or more EITIpiiots with coitries and will aim 1 16 Recommendationof the OED Evaluation ManagementResponse ~ to mainstream the approach to revenue transparency more broadlv inthe WBG. Together with other stakeholders, the Bank should Management accepts this recommendation. The WBG will define indicators of economic, social, and work with stakeholders to define appropriate sustainability environmental sustainability, establish baseline indicators that canbe usedto monitor andreport on outcomes. data, provide for adequate monitoring over the life OP 4.01 requires the collection o fbaseline data. IFC has of the project, and report and evaluate on the results recently produceda good practice note (Addressingthe Social during supervision and inproject completion Dimensions of Private Sector Projects)that provides guidance reports. The Bank should also encourage more on collection ofbaseline data; a similar exercise is plannedfor independent outside monitoring, ideally using local environmental data. These notes can also serve to guide capacity (that may have to be developed). IBRDADA and MIGA. The development o f independent local capacity for monitoringthe impact o f E1projects i s important. Capacity building within governments is already a key objective o f IBRD/IDA activities inthe sector. Development o f community/civil society capacity can helpwith project monitoring and can often be considered inthe project context. Inthe case ofvery large projects (such as inthe Chad- Cameroon pipeline or BTC pipeline projects), the creation of independent monitoringgroups may be practical and effective, andwill be considered. Insome cases itmay be appropriate to develop local capacity to play a role insuch forms o f oversight. Inaddition, see the responsesto the ----- __-_I- - Iircrease local eomniunity participation Management agrees with this recommendation. Enhanced ~~ The Bank should support enhanced community x-msultation and participation throughout the life community consultation and participation inEIprojects is a Zycle of EI-projects. The Bankshould assist key areao fevolvingbestpractice for IBRDBDA, inline with :owltries to increase involvement by local evolving experience inIFC. See the responseto Zommunities inE1decision-making processes, and recommendation o f OEG (3d) for details. ongoing consultation throughout the project life cycle, includi!xc!o!x5__p- 17 c. RECOMMENDATIONSOFTHE OEG EVALUATiON REPORT IFC should work closely with other partsof the , IFC Management supports this recommendation, and WBG to ensure that CASs for resource-rich I this respect are set out inthe detailed responses I countries explicitly discuss the E1sector's I proposals in to recommendations o f the Overview andOED reports and 1 contribution to sustainable development (e.g., I in the overall Management Response. IFC will work I importance o f fiscal revenues, their management, proactively inthe E1sector to identify opportunities for distribution, and use for development priorities) cooperation with IBRD/IDAand MIGA, andto develop , private-public partnerships as appropriate inthe context o f i ~ and obstacles for enhancing its contribution. The 1 I CAS should providean agreed framework for individualprojects. WBG-wide cooperation, with a particular focus on close interaction between IFC and the World Bank's country departments. IFC andthe World Bank should routinely work together to enhance the development impacts o f E1projects, for example in the form o f public-private partnerships with respect to community development programs. IFC andthe WBG should buildon existing initiatives such as Business Partners for Development andthe Comprehensive Development Framework to enlist the help o f other stakeholders, such as the IMF, other bilateral and multilateral institutions, industry l b When financing projects whose major expected (cont) development contribution is the generation o f revenues to governments, IFC should carefully review and discuss the governance riskthat these revenues will not be used productively. Where such will require transparency about EI-related payments to governance risk is high, andthe project's revenues governments and the terms o fkey contracts with are significant, IFC should work with the governments that are of public interest (such as Host government (inpartnership with the World Bank and IMF)to put inplace mechanisms to reduce this risk, including possibly ring-fencing o fproject revenue management. For all proposed E1 investments, IFC should addressthese issues in Board Reports. 18 Recommendationof the OEG Evaluation ~ ManagementResponse I IFC should continue to require high-quality environmental impact assessments that establish baseline data for relevant environmental and socio- economic impact indicators. These indicators- comparedto the baseline-should be consistently tracked and aggregated for IFC's management. Appropriate requirements to allow IFC to adequately mitigate risks and monitor all its projects should be included for all investments, particularly equity. Where IFC finds poor environmental and social systems or performance, it should addressthem proactively andvigorously. i s one that applies to all sectors; IFC will address this issue inthe context ofthe currentrevisionofsafeguard policies 19 IFC needs to ensure that its environmental and Itis agreedthat the early involvement ofenvironmentaland social specialists are consulted throughout the social specialists is warranted. Beginning with its first project life and as early as possible andthat environmentalreview procedure inMarch 1990 and investment officers fully share relevant continuing through subsequentprocedures (1992-1993 and information. To that end, investment officers need 1998),IFC has developed a culture o f ensuring that its to be better trained to identify risks and environmental and social specialists are involvedas early as opportunities. Also, changing the incentive possible inthe project cycle and throughout appraisal and structure by making the investment officer and supervision. Following the adoption o fthe 1998 "Procedure department explicitly accountable for for Environmental and Social Review o fProjects" a environmental performance would likely provide corporate-wide training program was conducted to apprise better incentives for calling inthe experts as early investment officers o fproject environmental and social as possible, not after a problem has materialized. requirements, as well as risks and opportunities. Sustainability training began inthe spring o f 2002 on a departmental basis, and it covers issueso f governance, environment, and social matters. For about two years, environmental and social specialists have been co-located in the Oil, Gas, Mining, andChemical Department's mining andoil andgas divisions; this has fostered coordination and early involvement inprojects. As mentioned inresponseto recommendation2a above, the environmental and social mainstreaming initiative at IFC explicitly places accountability and responsibility for environmental and social inquiry, decision making, and performance on line management. CES will retain an independent quality assurance role. IFC has also pioneered"Departmental Scorecards" that set departmental targets across a range of indicators, including development impact and the volume o f investments. IFC also recognizes outstanding environmental and social work initsperformance awards system. _______I-. --- WC should develop a reporting teiiiylate that specifies for each portfolio project which safeguard policiesand guicieliries apply, whether the conipan) is in compliance with them, and hou it performs witti respectto key sustaltiabilityindicators for the industry,Where relevant, IFC sliowldalso include "beyondthe fence tine" issues, such lls transportatha arid project-related security issues. 20 --_ - Recommendation of the OEG Evaluation -~ IFC should develop global comparators for the IFC already reviews the split o fresource project net benefits distribution o f benefits from EI-among investors, between investors and government. It also reviews the ways governments at different levels and local investors obtained access to resources. Management will communities. For its projects, IFC should analyze follow the recommendationto review more explicitly andto the distribution and compare it to other E1projects. test the distribution o fbenefits to different stakeholders, At appraisal, IFC should include the distribution including levels o f government. Wherever feasible it will effects inits sensitivity and risk analysis (e.g., compare the distribution o fbenefits to government and distribution o f benefits at different levels o f output others with international comparators usingestablished andprices), track actual distribution during the reference sources, evaluated against differentassumptions ` project life, and aggregate the data at the country about key variables such as oil prices and production. IFC's and sector level. annual project supervisionreports now track key development outcomes, and where revenue distributions are ----- an imeortant expected outcome,- will track these also. it ~ m e Stakeholders 3a Inconsultation with stakeholders, IFC should --Management I has taken its responseto the recently continuously update its environmental and social completed CAO Safeguard Policies Review to CODE, and safeguard policies, guidelines, and processes inline IFC has embarked on a program to revise its safeguards. with evolving good practice inthe industry.The This revision willtake into account CAO andOEG views on WBG should use its convening power andthe help E1andrecommendations such as those for safety of dams, o f its member governments to promote their use by mine closure, acidrock drainage, etc. Within the WBG, governments, industry, and other financiers. IFC there is agreement that IFC will take the lead inthe updating should develop, update or clarify policies and o fthe 1998 PPAH. One objective o fthe updating is to guidelines on Indigenous Peoples (or "vulnerable eliminate the inconsistencies inthe PPAH. Ongoing people"), safety o f dams, natural habitats (or collaborations betweenthe WBG and MFIs, as well as the biodiversity), security and humanrights, adoption o fthe "Equator Principles" by a growing number HIV/AIDS prevention, mining(closure--funding o f commercial banksthat will use IFC safeguards for their andsocial issues, acidrock drainage, precious project finance lending indeveloping countries, demonstrate metal mining), and oil and gas (gas flaring, that other financiers findthe safeguards useful andrelevant. downstream transportation o f oil). Industryandgovernments also often refer to the safeguard policies and guidelines, and the updating o fthe safeguards andthe PPAHwill make them more attractive to these stakehnlders. 3c Inconsultation with other stakeholders, IFC should See responsesto recommendations lb, IC,2c, and 3b 2a, develnn andtrack kev sustainabilitv indicators and above. IFC is developing an improvedprocess to collect 21 Recommendation of the OEG Evaluation Management Response consider disclosing themto demonstratethe relevantbaseline socioeconomic data for its projects, and it 1 economic, social and environmental impacts o f its will collaborate with IBRD/IDAinthis work andwith E1projects. Reportingon credible sustainable extemal stakeholders. The size o f projects (including their i development indicators will helpovercome the ability to bear the cost of such analysis) andtheir range o f I current inability to systematically demonstrate potential impacts will inform the choice o f indicators and results achieved. baseline data. IFC already monitors key development outcomes expected from projects andreports on these in its Ii intemal annual project monitoring reports. It will discuss its 1 approach with others andtake note o fbest practice inthe 1 sector, as appropriate, given the nature o f IFC's portfolio and its objectives. It will consider whether and inwhat form i fiiis evalu~tiun-f~~uridstrongeiidence th%-. inpuved comrriurtityconsultation is in the best long-term iiiterestof our clients. IFCshould thus ntake cantniutiity developrrieiit programswith ongoingconsultations the iiom for E1projects. Such prograiiis shouldstan with a participatory assessrtient of the cotntnunity's shuation and long term deveiopnient needs. Tluy shauldinclude ongoing consultations, fiicus 01)sustahiahle solutionsto nieet these needs, and prepare coinmunitiesfor the time after the exrractive operationscease. Good commurticatiatiis also likely to unprovc results-by listeningto people and bringexposed to public scrutiny and cliallenge. __ 3e IFC should routinely share best practice among IFC will institute a more systematic approach to advising clients and encourage them to apply it. IFC should clients o f updateslchanging best practices and encourage communicate its informationneeds better to its them to apply these even when they are not obliged to. The clients, for example by tailoring reporting to their new relationship with the "Equator Banks" provides an ownrequirements. Clients very much appreciated important additional way for IFC to communicate beyond its assistance they had received from IFC staff, but direct client base. IFC needsto ensure that client reports were eager for more. IFC should buildon its cover at least its minimumrequirements interms o f various initiatives to add value and further facilitate safeguards. It will work with sponsors to ensure reporting is exchange of ideas among its clients, for example by as effective as possible for both IFC andthe client, given organizing conferences and further developing specific project needs. As noted (see responseto toolkits on how to best address environmental and recommendation 3a above), IFC is now respondingto the social issues. CAO review o f its safeguards, and updating and revising safeguards may offer the opportunity to make these more "customer friendly" without dilutingtheir key objectives. Management agrees that it can (often as a WBG approach) use its convening power and range o fclients to promote the ~ - _ _ _ _ ______ 22 I 1selectively. A schedule for best practice notes, lessons I II i L--___ _ _ _ _ ~ - - - - - -____---.--I 23 D. RECOMMENDATIONSOFTHEOEUEVALUATION REPORT ---__ .-_ ~ _ _ _ _ _ _ _ _ Recommendation of the OEUEvaluation r-p- ___________________ - Management Response Strategy and Rules of Engagement: MIGA needs I MIGA Management is committed to implement this to recognize and promote the potential benefits it recommendation and will look for such opportunities to bringsto E1projects through its internationally promote the potential benefits it brings to insuredprojects recognized and comprehensive set o f safeguard through its internationally recognizedand comprehensive set of policies and its environmental and social impact safeguard policies and its environmental and social impact mitigation services. MIGA's engagement with E1 mitigation services. Management is committed to promoting projects should move beyond compliance with its projects with the greatest development impact andthat are environmental and social safeguard policies toward economically, environmentally, and socially sustainable. the promotion and achievement o fthe development MIGA's new organizational structure will facilitate this. effectiveness o fthese projects. Management reviews will focus on development effectiveness, andthese reviews now will be done early inthe project process cycle. See responses below concerning specific recommendations inthis subject area. Recognizing that MIGA has the opportunity to add Management hlly recognizes that MIGA should be more value to EIprojects by adopting an explicit business proactively involvedinthe social and economic aspectso f EI strategy focused on providing proactive projects. MIGA this year has hired a senior social specialist as environmental and social advice to its guarantee part o fMIGA's Environment group. A senior manager, whose clients that brings E1projects closer to best practices responsibilities include reviewingthe economic, inthe industry,with the goal o fachieving environmental, and social aspects o f MIGA projects, has also sustainable development. This requires joined the MIGA Management team as Director and Chief strengthening the economic and social components Economist inthe newly formed Economics and Policy Croup. inMIGA's work inaddition to the environmental This expansion ofMIGA's in-house capacity and additional component. This calls for a more proactive, forward economic, social, and development impact training o f staff will looking approach to servicing clients that goes enable MIGA to take a more proactive approach to E1clients. beyondthe current practice o f intervening only Moreover, MIGA hasjust undergone a major reorganization o f when events warrant it. its functional groups, to better integrate environmental, social, and economic analysis, to offer a more holistic approach to assessmento f developmental impact o f prospective projects, andto integrate the guarantees program and technical advisory services to better serve clients. MIGA will adopt a more proactive approach to offer advice and support to E1projects, especially sensitive or complex projects. The budgetary implications o fproviding proactive support subsequentto issuingcoverage will needto be analyzed further, andMIGA will seek to secure support o f a Trust Fundto enable a more intensive focus on such work. -. Strengthening the upstreaminvolvement o f Management concurs thatit is advantageous to strengthen the environmental and social issues inMIGA's upstream involvement and consideration o fthese issues. underwriting decision-making process. This entails Management will notify clients as early as possible about consistently identifyingapplicable safeguard applicable MIGA safeguard policies. Management notes that in policies to clients as early as possible inthe recent years experienced E1investors tend to be well aware o f underwriting process, and usingrisk assessments these policies before coming to MIGA. It should be noted that early on to identify where failures inthe safeguard a large majority o f guarantee applications arrive at MIGA with system may occur to avoid adverse impacts on the the environmental assessmentprocess already completed and environment and local communities. the environmental impact assessment approved inthe host country. ___- MIGA needsto make a greater effort to work with Management__________ the thrust o f this recommendation, concurs with clients to ensure compliance with its environmental andthe recent hiringo fa social specialist will facilitate this, and social safeguard policies and guidelines at the Management notes that its business model (and the Operational time o f Board approval. Regulations) provides scope for including as conditions o f guarantee, the completion ofproposed or ongoing critical safeguard tasks, subject to Board approval. As has been done since MIGA adopted its own environmentalElicies and - 24 ~___~ _..- Recommendationof the OEU Evaluation ManagementResponse procedures in 1999,Management's commitment i s to notify the Board o f any outstanding, significant concerns that will needto be addressedas part o f contractual requirements inthe guarantee(s) for the project. The expansion o f MIGA's in- house environmental and social expertise will leadto greater effort inmonitoring subsequent compliance for projects that __ have highrisk duringimplementation. ._._____ - _ _ _ _ . - ~ ~ _ _ ______ ~ -____ ______ __ naddition, MIGA needs to consider how its work Management will offer prospective clients advisory support to nassessing, underwriting, andsupervising its enhance the developmental impacts ofprojects, to go beyond Suaranteeprojects can go beyond the monitoring o f compliance with safeguards andpromote sustainable :ompliance with safeguards towardpromoting development. A model o fthis mightbe work done over the levelopment effectiveness inits projects. past four years by MIGA's environmental specialist inthe context o fthe Antamina Mine inPeru. The budgetary implications o f this proactive support will needto be analyzed further as Management gains additional experience inthis -__ ________ ____-.- ____ effort to add value to clients. ___________________ 4ssociating with investors committed to sustainable Management associateswith investors that are committed to ievelopment and avoidingthose who are unable to sustainable development, but also notes that this Jrovide MIGA with timely environmental and recommendation poses some challenges for lenders or minority gocia1monitoring reports during implementation. partners. The majority o fMIGA guaranteesthat have been issued have been heldby lenders or minority partners, clearly demonstrating the value o f MIGA's products to this type o f investor. The implications for these investors will needto be carefully assessed inthe context o fhow their investments contribute to outcomes of sustainable economic and social development. Proactive measures (e.g., working through the best efforts o fthe investor or lender to implement best practices, distribution o fbest practices, etc.) can be taken. In this respect, MIGA will take comfort inthose lenders that have committed to the "Equator Principles." Management also notes that great care will be needed to ensure that "South-South" MIGA should satisfy itselfbefore engaging___ __ -_ investments are not-Gsgriminated against. Management agrees with this recommendationandhas put in ~ innew -_________ E1projects that the investor understands its place an upstream review process for all projects, to address mvironmental and social responsibilities and this and other issues. Management takes into account client lemonstrates ownership at the top management reputation, and assessesindicators o fthe likely risk for level to community development and mitigating noncompliance during implementation and the associated risks mvironmental and social impacts. The project o f faulty implementation. mterprise's organizational structure, policies, and See resp~nses2a, 2b, 2c, and 2d below. I~ -~ See response to recommendation 4a. Management accepts that :imely engagement and systematic monitoring to itcould do more inthis area (see responseto recommendation ,naximize environmental and social benefits. la). Inparticular, MIGA will encourage investors inE1 projects to approach MIGA at a very early stage. Management has had internal guidance with respect to the selection and prioritizing o f site monitoring over the past four-five years. In July 2003, Management implementeda more standardized approach to monitoring compliance and performance o f all new -__ __-_ E1projects. fhis will entail avoiding projects where MIGA can Management will avoid projects whose net outcomes are not__ - ._ lot address environmental or social issuesto anticipated to be positive. improve the outcome due to its late participation. _______ ~ _ _ ~- Site visits by MIGA's environmental and social ___ Under the newly reorganized structure o fthe Agency, project- 25 ___.___ Recommendation of the OEU Evaluation Management Response :xperts should be required as early as possible inits eams will normally visit the project site prior to any decision nvolvement incategory `A' and other high-risk o recommend approval o fthe project to the Board. MIGA's xojects to assess which policies are applicable. Znvironmental and Social Review Procedures call for a site MIGA should not rely exclusively on assessments risit as part o fthe environmental andsocial review and due indreports o fnon-WBG institutions. liligence during the underwriting o f Category A projects; these ilso will be carried out as early as possible. The procedures illow for the site visit to be carried out by qualified MIGA or FC experts or by a qualified consultant (whose work will be ~- - - ~ _ _ _ _ _ .eviewed by qualified staff). incorporating standards recognizing the rights o f .nthe context ofthe overall WBG approach to these issues, individuals relatingto security arrangements at E1 Management will evaluate and help develop best practice xojects into its policies and Operational ipproaches to EI-specific issues. wa:ions.p-- Makingbetter use o f-MIGA's Contracts o f __ __ With~respect to environmental guidelines, MIGA's practice for _ _ __ _ ~ - ~ _ __________ Suarantee to enable the Agency to facilitate he past five years has beento attach the appropriate guidelines :ompliance with its policies and standards. In o the contract as conditions o f coverage. With respect to xddition to the current requirement to comply with Safeguardpolicies, see responseto the next part o f this safeguard policies and environmental and health anc aecommendation. safety guidelines, for hture projects MIGA should :nsure that the contracts clearly and explicitly state which environmental and social safeguard policies and guidelines apply to the project under guarantee andestablish thresholds and conditions for timely and effective compliance. When applicable, contracts should also specify --- Management agrees with this recommendation. Management requirements for implementation o f Environmental sees this approach as the mechanismby which project-specific Management Plans (EMPs), Resehlement Plans requirements o f the safeguard policies can be addressedby (RPs), Community Development Programs (CDPs), binding and legally sound contract requirements. Management and Indigenous Peoples Plans (IPPs). takes care that any contractual requirements are clearly definec inaway that failure to comply canbereasonably assessedin the event o f arbitration arisingover the decision by MIGA to deny a claim or unilaterally cancel coverage due to _- mxn2ompliance. - A s required by the involuntary resettlement and Management agrees that these plans should be preparedbe&& Indigenous Peoples policies, MIGA should ensure project approval. However, these are not static plans and that investors prepare RPs, CDPs, and IPPs before require adaptation to evolving circumstances. Also, project approval rather than leaving them to Managementbelieves its business model provides scope for implementation. including, as conditions o f guarantee, the completion o f proposedor ongoing criticaltasks, subject to Board approval. Insuch cases, MIGA conducts necessary follow-up and monitoring to ensure compliance. -._ _ _ ~ Establishing necessary mechanisms to ensure Management believes it i s obtaining information intimely and systematic, timely, and regular monitoring and cost-effective ways for sensitive projects (e.g., Category A), supervision o f safeguard compliance o fMIGA E1 and not levyingexcessive demands on guarantee holders for guarantee projects (e.g., MIGA should require inits Category B projects. Management believes thesejudgments are Contracts o f Guarantee timely environmental and important contributions to the Agency's efficiency and social monitoring reports from its guarantee holden effectiveness, as noted inparas. 49-51 o fthe OEU report. during the project implementation phase). Nevertheless, inresponseto this recommendation, Management has implemented a more standardized approach to monitoring compliance and performance o f all new E1 ______ __ projects. -~ ______ Management identified this matter in2000 as a lesson leamed ~ MIGA should also require sponsors to set up environmental and social project management from its experience with Antamina project inPeru. systems at a sufficiently early stage to effectively Management now considers this inall prospective E1projects monitor impacts, including during the construction where it has been identifiedas a potentially significant concern stage. -- risk. and - lintenial (frgolnbrtion See responsesbelow to specific recomrnenciations illthis t MKjA si~c)i~lJ update its business niodol by clearly suhjecl area, MlGA hasjust undergone a m j o r i-a?organizrrtioii 26 Recommendationof the OEUEvaluation ManagementResponse -- hat mated a unit to iiitegrate the assesstnetit of economic, . - envirottmenlal, and social issues in MICiAoperations, and to approachdeveiupnental impact assessment ina mole holistic t'ashion. Scaling up the analysis o f developmental impacts o f MIGA Management supports the recommendation andhas prospective projects integrating new concepts in made significant steps over the past few years to more closely harmony with the rest o f the WBG. Inso doing, cooperate with other members o f the WBG (e.g., work on MIGA should closely cooperate with the other CASs, sector strategy papers, the Extractive Industries Review, members o f the W B G to benefit from synergies, etc.) to benefit from synergies, complementarities, experience, complementarities, and expert knowledge, with the andexpert knowledge. Efforts will continue to be madeto objective o fpromoting a holistic approach to E1 scale up these actions. pxiects-...___- - ____ - - ~~ This will also require buildinginternal capacity by MIGA Management has builtand intends to further buildits bothrecruiting needed economic skills and internal capacity inthese areas. Initial training o f underwriters appropriate training to current staff. has already been conducted by an IFC economist, who has subsequently joined MIGA's staff as senior manager (Director andChiefEconomist) for country assessment, policy, ~ ~ _ _ _ _ economics and strategy (Economics and Policy Group). ______ .. The recent reorganization of functional groups, andthe intent ~ .~ Establishing an internal system that allows a more integrated and timely monitoring o f developmental to increase site visits to prospective projects, will offer impacts o f guaranteed projects. opportunities to increase timely monitoring o f guaranteed projects inMIGA's portfolio. The plannedcloser collaboration with OEU will enhance this. Upgrading and expanding the role o f environmental As previously noted, an experienced social specialist hasbeen and social specialists and, at the same time, building hiredas part o fMIGA's Environment group (which has now internal social skills capacity to effectively enable beenincorporated into the newly formed Economics and Policj the application of social safeguards inMIGA Group) to augment and buildinternal capacity. P*L --- .. i Formalizing the practice o f ensuringthat MIGA Management agrees with this recommendation and is making ' environmental staff are involved inprojects beyond changes inits internal procedures to enhance the timeliness and the submission o f clearance memos, and requiring extent o f its environmental and social specialists involvement that MIGA environmental and social staff to provide inthese and other operational areas. I I inputsto guarantee andlegal documentation to incorporate any environmental and social concerns. Inaddition, MIGA underwriting staffshould be requiredto keep environmental and social specialists appraised of all relevant changes beyond Identifyingprojectsthat may not be consistent with safeguard policies. Inparticular, where resettlement andlandacquisition has taken place without follow- safeguard policies. This identification hasbeenusedto develop i andregularly identified"higher risk" projects vis-&vis ~ upaudits to determine compliance with WBG a monitoring program o f site visits, which has includedeight 1 policies regardingresettlement, third-party audits E1projects inthe course o fathree-year period. MIGA plansto ~ should be required. Similarly, where Indigenous expand this effort. Also, soon after the Office o fthe CAO was Peoples have been affected without the provision for established in2000, MIGA provided a list o f all projects in Indigenous PeoplesPlansto mitigate the impacts, MIGA's portfolio that involved involuntary resettlement or sponsors should be asked to prepare and implement Indigenous Peoples, discussed the risks o f each project with the ~ such plans. Providing briefings on potential CAO, and described the monitoring that MIGA directly had problems with sensitive projects, a system currently been carryiBxut or had been relying on to track the projects' 27 _ ~ _ _ _ _ _ _ _ _ _ _ ~ Recommendationof the OEUEvaluation ManagementResponse used by MIGA, is useful butnot sufficient. MIGA compliance issues. Briefings o f the CAO on sensitive projects should take appropriate remedial actions to address inthe pipeline andthe portfolio havebeenregularly provided existing safeguard deficiencies inextractive industry (approximately quarterly) since then, as have exchanges o f projects that are still active in MIGA's portfolio. information with the IFC on common projects. MIGA continues to review regularly the project portfolio and identify priority projects for monitoringvisits, focusing particularly on projects with higher risk.Management will consider on a case- by-case basis the need for a third-party audit o f compliance with MIGA's policies. Management believes that it has taken care to ensure that, when Indigenous Peoples are at risk for significant adverse impacts, plans have been established and implementedto effectively mitigate those impacts. .__ ~~ Making every effort to encourage consistency with There are no longer any remaining active reinsurance contracts MIGA's safeguard policies inactive extractive ofthis type. As noted by OEU, this matter has beenaddressed industries projects with reinsurance agreementspre- innew contracts. dating the new MIGA practice. New agreements require that environmental and social standards applied by partners are consistent with MIGA's own 28 EXTRACTINGSUSTAINABLE ADVANTAGE? (REPORT ONTHE CAO REVIEW) WORLD BANKGROUP MANAGEMENT RESPONSE ManagementResponseto CAO Report:ExtractingSustainableAdvantage? A Review of how sustainabilityissueshavebeen addressedin recentIFCMIGA extractiveindustryprojects Introduction As a contribution to the WBG's review' o fits role inextractive industries, the CAO's office conducted an assessmento fhow sustainability issues were addressed in recent IFCMIGA extractive industryprojects. The specific objectives ofthe report were to consider whether the interpretation and application of Safeguard policies and guidelines hadenhanced project sustainability andwhether allrelevantissues were considered during project appraisal. The basis of the reviewwas an examination, includingsome country visits, of eight recent IFC andMIGA E1projects that were too recent to have been included inthe OEGandOEUevaluations ofIFCandMIGAactivities inEI. The review didnot assess the net sustainable contribution ofthe projects, it was too early intheir life, and, the review was not intendedto do that. It considered how IFC and MIGAhadapproached the appraisal andreview o fprojects from the perspective o f a comprehensive set o f sustainability dimensions. Some o f these dimensions had mandatory criteria that needed to be addressedinexisting safeguard policies and guidelines andothers that didnot. Typically, specific mandatory criteria exist for environmental and social processes and standards, andnot for broader economic and governance dimensions Report Findings and Recommendations The report had a numbero fkey findings andmade a number ofrecommendations for how IFC andMIGA could better address key sustainability issues. As the report makes clear, it was intendedto be forward looking andto assess to what extent the two institutions were addressing sustainability issues beyond those mandated intheir safeguard policies and guidelines. Overall, the review found that, against, " a review methodology that holds all projects to a very highstandard", the institutions scored highest in addressing environmental and social dimensions where there were mandatory criteria and least well inaddressing economic andgovernance dimensions where there were no mandatory criteria. It also found that there was significant variability betweenspecific projects andthat in a number o f areas there was scope for IFC andMIGA to refine or develop guidelines and processes andalso to improve implementation. `These reviewsconsistedof: Extractive Industriesand SustainableDevelopment: An Evaluation of the WorldBank Group s Experience, OED/OEG/OEU,June2003, availableat www.worldbank.org/oed Extracting SustainableAdvantage?, CAO, April 2003, availableat www.cao-onibudsman.org. Strikinga Better Balance, EIR, January 2004, availableat www.eireview.org. ProposedResponse Management welcomes the report that provides valuable insights and suggestions about how IFC and MIGA's activities inE1can be enhanced. It has some concerns about the lessons that can be drawn fkom a small sample size o fprojects, particularly inthe case o f MIGAwhere only two recent projects were reviewed. Inaddition, it believes that in some areas, consideration o fissues such as governance andpolitical risks was more extensive thanidentifiedbythe review process, because it was done ina more informal way than, say, the review o f specific, mandatory environmental and social criteria. Overall, however, it sees the review as a useful exercise and welcomes it as one that can help guide IFC andMIGA's approach to E1inthe future. Ithelpsidentify the broadening concept o f sustainability and scope for value added that is consistent with Management's own thinking, andthe direction inwhich IFC and MIGA activities inE1have been heading. Detailed responses to the recommendations of the report are attached inAnnex 1. Manyo fthe specific andgeneral issues raisedinthe CAO review havebeencoveredinthe EIRreport, andthejoint OED/OEG/OEUEvaluation o fWBGactivities inEI. An extensive discussiono fthe issues in, many cases, i s given inthe Management Responses to these reports. As is the casewith these other reviews, the full implementationo fManagement's response to this reports recommendations will depend on the outcome o f other processes of review that are now underway. Inareas such as the recommendation that the WBG should recognize increased awareness o fthe humanrights andlabor rights dimensions of WBG activities, Managementproposes to wait the outcomes of ongoing IBRD/IDA and IFC reviews o f this issue. Inthis respect, IFC presented proposals addressing labor rights to CODEinJuly 2004 inthe context o fits proposedrevision o fits safeguards. Since the delivery o fthe CAO report, Management hasproduced its response to the broader C A O review o f IFC's safeguard policies' andhas embarked on the process o f revising IFC safeguards policies and guidelines. This process, will give priority to E1 related issues, will address manyo fthe CAO's specific recommendations. IFC's ongoing review of its disclosure policy will provide an overall framework for greater disclosure to communities about the economic, social and environmental impacts o fprojects that affect them. A Review o f IFC's Safeguard Policies.CoreBusiness: Achieving ConsistentandExcellent SocialandEnvironmental Outcomes. January2004 availableat www.cao-ombudsman.org. - 2 - ANNEX1 DETAILED MANAGEMENT RESPONSES Recommendations of the CAOReport Recommendation of the CAO Management Response 1 IFC and MIGA have a more considered approach to The review by IFC o f its safeguard policies andresponseto tackling the environmental and social development the CAO report will provide an overall revision of scope, dimensions o f sustainability than the economic and content, and approach to safeguards. This is now underway govemance dmensions. IFC and MIGA should and an overall framework will be considered by CODE in reinforce their existing guidance to more clearly June. The process will identify areas where it is considered encompass a wider set o f sustainability concems. As appropriate to include new safeguard policies and the sustainability agenda i s evolving, a flexible guidelines. Inaddtion, Management proposals to give approach to introducing revisions shouldbe adopted. greater focus to governance issues and more explicitly This should enable bothorganizations to update address govemance risks will also help address concerns in internal guidance efficiently and systematically in t h ~ respect. Inpractice, IFC does update its policies and s responseto emerging best practice, insupport o f guidelines periodically as needed. MIGA i s workmg with continuous improvement. Where appropriate, the IFC inthe update o fthe IFC safeguard policies. The effort guidance should clearly identifymandatory will be valuable to MIGA, and following its completion, requirements. MIGAwillrevise andupdate its ownsafeguardpolicies, as __ per MIGA's commitment to the Board inMay 2002. 2 The rating ofindividualprojects againstthe MIGAhasjust undergone a major reorganizationofits sustainability review criteria was highly variable, functional groups, to integratebetter its environmental, although IFC's category Bprojects outperformed social, and economic analyses. With this new MIGA's. MIGA's management should consider and organizational structure, MIGA Management is committed take a positionon this disparity: either it maintains the to promoting projects withthe greatest development status quo whereby MIGA projects subscribe to the impact, that are environmentally, socially, and standard o f do-no harm(whch the Safeguard Policies economically sustainable. are primarily concerned with), or it takes action to ensure closer convergence with IFC's broader sustainability remit. 3 IFC andMIGA lack sector-specific guidance onhow IFC will finalize and implement its intemationalbest to undertake comprehensive risk assessments.IFC and practice guidance on cyanide inits draft Precious Minerals MIGA should develop sector specific guidance on MiningGuidelines (July 2004) that arebeingrevisedas a how comprehensive environmental risk assessments component o f the revision o f its safeguards. It will should be undertaken. Inaddition, IFC should finalize consider IFC-wide guidelines on comprehensive risk and fully implement its draft guidance on cyanide assessmentas a part o fthis process, andMIGA, with its handling. recent reorganization, will reassess its approach to comprehensive risk assessment. 1 Despite the existence o fthe NaturalHabitats and The ongoing IFCreview that willconsider the updating o f Environmental Assessment Policies, there is this, and the other safeguard policies willbe usedto review insufficient guidance on ecological assessmentand measures for addressing these challenges. As noted in(1) mitigation. IFC and MIGA should develop and above, MIGA will follow with its ownreview implementimproved guidance onecological assessment and mitigation. 5 While at least some financial provision is made for IFC will produce guidelines for a consistent approach to closure of miningprojects, this is not the case for oil mine closure. Key aspects o f t h s willbe requiring and gas projects. F C and MIGA should strengthen investors to have a mineloil and gas field closure planthat the available guidance on closure to apply to all deals with environmental and social issues and is regularly extractives projects, andinclude a requirement to updated to account for changed circumstances; public ensure that social considerations are taken into awareness o f closure plans; and appropriate financial - 3 - Recommendation of the CAO Management Response ,, I account. They should also develop and implement provision for closure consistent with country requirements measures to ensure that funds allocated to closure andnature o f project. Inthis latter respect, ring-fenced during their involvement with a project are ring- funding or equivalent willbe put inplace ,when feasible. fenced, even af'ter they exit. MIGA intends to act inconsonancewith the expected revisions andmodifications to IFC guidelines. 6 W u l e most clients are undertaking pre-approval IFCMIGA agree that, whenpossible, it will advise those consultation well, there i s little or no acknowledgment involved o fthe outcome o f consultabons. New IFC o f the influence that public consultationhas had on projects will be requiredto provide informahon to local I the design andimplementation o fprojects. IFC and communities andestablish an appropriate programo f i MIGAshould more explicitly acknowledge andreport consultations. MIGA will review its guidelmes onthe onthe influence that public consultationhas had on information to be providedlocal communities andon the 1 the design and implementation o f projects. The consultationprocess with local communities. I benefits o f ongoing consultation and engagement throughout a project's life cycle should routinely be articulated to clients, andrequired for the period of IFC or MIGA's involvement. 7 The communities inthe vicinity o fIFC andMIGA IFC andMIGA agree that all E1clients should be made projects would benefit from an explicit adoptionby familiar with IFC's "Investing inPeople" good practice both organizations of a commitment to promote more manual. A major component o f the IFC approach to sector sustainable community development projects and activities is to add value. Programs such as the SME programsby its clients. IFC andMIGA should ensure Linkages are one such effort. Encouraging sponsors to that all clients are familiar with IFC's Investing in develop meaningful community relationship programs with People guidance, andunderstand the importance o f longer-term sustainability objectives is another. direct community participation and explicit consideration ofthe longer-term sustainability o f community investment projects. ~~ B Neither IFC nor MIGA systematically consider the There are many aspects to the human rights issue. Project broader human rights and labor rights issues appraisal should identify immediate issues that may associated with extractives project. Instead, IFC and directly impact project outcomes. How far to go beyond MIGAshouldmore systematically consider potential this stage interms o f identifymg risks to humanrights and risks to human rights at the project level, take mitigating themneeds to be set by the broader WBG appropriate steps to mitigate them, andprovide clearer approach to humanrights. Both IFC and IBRDDDA are guidance to clients on both o fthese aspects. Where now inthe process o f reviewing their approach to these relevant, these aspects should be reported on at the issues and the outcome will provide a framework for project level. activities inEI.IFC presented draft proposals for an approach to labor rights inthe context o f its safeguards revisionthat was discussed by CODE inJuly, 2004. Inthe specific context o fEI, I F C M I G A will expect new investors to follow a guideline relating to the use o f security forces along the lines of the "Voluntary Principles on Security andHumanRights" that were developed through a multi-stakeholder process o f dialogue between the Governments of the U.K.andthe U.S., extractive industrycompanies, andNGOs. 9 A number ofother social issues are not systematically IFC's GoodPractice Note, "Addressing the Social assessedand mitigated across allprojects. IFC and Dimensions o fPrivate Sector Projects" (December 2003), MIGA should develop improvedguidance onhow to will assist inidentifying, analyzing, and addressing social deal with these issues, and integrate it into improved issues. It will be an integralpart o f IFC's environmental guidance on social assessment, as recommended by and social assessmentprocess. Since Board approval o f the CAO Safeguard Policy Review. MIGA's safeguardpolicies andtheir implementation framework inMay 2002, MIGA has been applying an - 4 - Recommendationof the CAO Management Response integrated approach to the safeguard policies, positioning the EA process(and the EA Policy) as a key "integrator." Inthls approach, the issue-specific safeguardpolicies become the norms by which one evaluates ifthe proposed mitigationlcompensationmeasuresidentified inthe project's EA are reasonable and acceptable, while retaining at the minimumthat the project mustdo no harmto directly affected parties. Thls approach to integrating MIGA's issue-specific safeguard policies and MIGA's environmental guidelines through the EAprocess (and under the umbrella o fthe EA Policy) was identifiedby the DGOinthe May 2002 Boarddiscussion o fMIGA's interim safeguardpolicies, as a model o f a holistic, multidimensional approach to incorporating safeguard policies inassessments. The environmental and social assessment for the project also is the opportunity to assess social concerns and needs to done so that MIGA's clients can determine appropriate ways o f going beyond compliance to further sustainable community development. LO Revenuemanagement and distribution i s a critical Weak governance canpotentially leadto poor oversight of issue for the future involvement o f the World Bank the E1sector andpoor management anduse ofrevenues Sroup inthese sectors, andneither IFC nor MIGA from EI.IFC and MIGA's approach will be to (a) work have a coherent strategy on how to respond to this withIBRD/IDAto ensure that E1issues are addressedin shallenge. IFCshould consider revisiting the current the CAS (see response to recommendation o fthe Overviem iefmition o fhigh-impact to be more inclusive. Itis report 1b above); (b) support IBRD/IDAefforts on surrently based on the relative contribution o f a single transparency initiatives such as EITI;.(c) for "significant" ?reject to fiscal incomes, whereas it might be newprojects (usually large enoughto generate 10percent zitended to include large projects (above a defined or more o f government revenues) to require adequate threshold) incountries where the sector as a whole mitigation measuresto be put inplace to reduce the risks makes a significant contribution to GDP. For high- that revenues will be wasted; (d) have smaller projects impact projects, IFC should report onthe steps taken carefully evaluate the risks that revenues will not be used LOmitigate adverse impacts and enhance revenue well compared with other expected benefits andreview management anddistribution. For low-impact issues inthe Summary o fProject Information (SPI); (e) to projects, IFC andMIGA should report on their require transparency about E1payments to governments rationale for providing support to such projects, and the terms o fkey contracts with governments for all having filly considered the potential positive and "significant" new projects; and (0 withintwo years, to idverse economic, social and environmental impacts. expect transparency about material E1payments for all [FC and MIGA should also continue to collaborate IFC- and MIGA-supportedprojects. with the World Bank on the inclusiono fthese aspects inCountry Assistance Strategies (CAS), andengage IFC/MIGA willalso work with and support the IBRDIIDP with the Bankand IMFto seek coordination o f work as appropriate, inpreparation o f CASs, transparency programs that addresspublic expenditures initiatives, and IBRD/IDAinitiatives onrevenue management, which are beyond the mandate o f IFC management. i dMIGA. 11 LFC has no systematic basis for reporting the As IFCandMIGA adopts the approachto dealing with significance o f public corruption, political instability, governance and ETprojects set out above, they will need tc mdconflict duringproject preparation, andneither mitigate or evaluate the impact o f governance (including [FCnor MIGA have the leverage to take proactive butnot limitedto corruption, etc.) onproject outcomes. In action on these issues. IFC and MIGA should their project appraisal, both IFC and MIGA will review :ollaborate closely withthe World Bank to ensure that andfollow any indications o fproject-related corruption. hese issues are explicitly dealt withinthe appropriate They will work withIBRDIIDAinhelping to identify operational instruments (e.g., Public Expenditure sectorslissues andinidentifying appropriate responses.A - 5 - ~~ Recommendation of the CAO Management Response Reviews, CAS) of the countries where they are likely major part of IBRD/IDA activities inpoor-governance to support oil, gas andmining. Inaddition, the countries is focused on dealing with such governance investment and underwriting departmentsshould issues (such as, for example, IBRDLDA's approachto collaborate with their environmental and social LICUS (low income countries under stress) countries). counterparts to more explicitly analyze andreport the The statusofIBRD/IDA(and IMF)programs inthe potential for in-country corruption, political country andthe CAS will also be taken into account inIFC instability, or conflict to result inadverse impacts at and MIGA evaluations o f country-level governance issues. the project level, or to increase as aresult ofthe And inaddition, arange of WBG andother qualitative and project. quantitative indicators (such as IBRDDDAs CPIA assessments (country policy and institutional assessment) __ will be reviewed. 12 Whlle IFC and MIGA voluntarily consider issues like Mainstreaming environmental andsocial issues and maximizing local, regional, andnational procurement growing experience and awareness among investment and employment opportunities, there is M e r scope officers about SME linkage programs, etc, will help IFC to to maximize economic opportunities arising from addvalue interms o fbroadening the impact o fprojects extractive sector projects. IFC and MIGA should financed. IFC i s considering preparing guidance notes for clarify where the responsibility lies for ensuring that staff and others to help identify opportunities indifferent economic development issues (such as employment, sectors. MIGA recently added staff expertise insocial and procurement, andbasic economic infrastructure) are economic impact assessmentand inthe recent dealt with. They should develop improved guidance, reorganizationhas consolidatedresponsibility for such both for internaluse and for clients, onthe economic assessments inone group. Core responsibility for development issues that should be considered and decisions involving employment, procurement, andbasic how, the obstacles that often exist to maximizing economic infrastructure should continue to be with the potential opportunities, and how to overcome such private sector investors, andnot lenders or insurers. obstacles to gain the maximum advantage from extractives projects. 13 Sustainability innovations are emerging- albeit inan IFC does put ina lot o f effort inspreading information ad hoc manner. Although informal sharing o f ideas among staff about sustainability issues. The ongoing IFC between specialists takes place, IFC and MIGA sustainability-learning programthat almost all staff inthe should explore more formal mechanisms to record and Oil, Gas, Miningand Chemicals Department have been share experiences. through i s one example. MIGA has recently reorganized to consolidate its work int h s area, andhas augmented this withrecently acquired staff capacity insocial and economic impact assessment. 14 If businesscaseforsustainabilityistobemade the See responsesto recommendations 12 and 13 above. IFC persuasively, the concept that sustainability has a sustainability database that provides investors with innovations have a returnon investment should be examples o f developing country projects that benefit from demonstrated. IFC and MIGA should develop a sustainability approach. In2004, MIGA intends to mechanisms to buy-down or reduce the perceived explore the possibility o f suchmechanisms further. incrementalcosts of higher risk sustainability innovations where the returns on investment are not readily demonstrable. Such mechanisms should avoid the provisiono f any subsidy to the project, while supportinginnovation. 15 MIGA'sresponseto the challenge o fenhancingthe In2004, MIGAintendstoexplorewaysinwhichan sustainability o fextractives projects is limited by the investment insurer may offer added value to its clients, `do no harm' focus of its procedures, which inturni s with the recentreorganization o fits functional groups as a linkedto itsbusiness model. MIGA shouldconsider mechanismto exploit these opportunities as they are whether the broader advisory services capacity on identified. sustainability within the Bank Group could be - harnessedand applied where MIGA clients express an - 6 - I I Recommendation of the CAO Management Response - 7 -