Report No. 26373 Extractive Industries and Sustainable Development An Evaluation of World Bank Group Experience (In Four Volumes) Volume IV: MIGA’s Experience July 29, 2003 Operations Evaluation Unit Document of the World Bank .. 11 Abbreviations and Acronyms AMR Annual Monitoring Report CAO Compliance Advisor/Ombudsman (for IFC and MIGA) CAS Country Assistance Strategy CDP Community Development Program EA Environmental Assessment EAP Environmental Action Plan ECA Export Credit Agency EDC Export Development CanadaExportation et developpement Canada EFIC Export Finance and Insurance Corporation (of Australia) EI extractive industries (oil, gas and mining) EIB European Investment Bank EL4 Environmental Impact Assessment EIR Extractive Industries Review EMP Environmental Management Plan EMS Environmental Management System ERR economic rate of return ESHS environmental, social, health, and safety (requirements) FDI foreign direct investment FY fiscal year (July 1 to June 30) IBRD International Bank for Reconstruction and Development IDA International Development Association IF1 International Financial Institution IFC International Finance Corporation IMF International Monetary Fund PP Indigenous Peoples Plan MIGA Multilateral Investment Guarantee Agency NGO nongovernmental organization OED Operations Evaluation Department (World Bank) OEG Operations Evaluation Group (IFC) OEU Operations Evaluation Unit (MIGA) OPIC Overseas Private Investment Corporation PSD Private Sector Development RMC Risk Management Committee RP Resettlement Plan SME small and medium-sized enterprise TA technical assistance TI Transparency International WBG World Bank Group - EXTRACTIVE INDUSTRIESAND SUSTAINABLE DEVELOPMENT MIGA’S EXPERIENCE Operations Evaluation Unit ... 111 Definitions Extractive industries for this review include oil, gas, and mining o f minerals and metals. Sustainable development meets the needs o f the present without compromising the ability o f future generations to meet their own needs. This requires sound environmental and social performance and economic efficiency. Given that fiscal revenues constitute the major source o f net benefits (beyond the project financiers) obtained from the extraction o f mineral resources, the interests o f h t u r e generations can be protected through the efficient utilization o f these revenues for society at large. Revenue management refers to the collection, distribution, and utilization o f govemment revenues. The World Bank Group includes IDA, IBRD, IFC, and MIGA. In this report, the combination o f IDA and IBRD are referred to as W o r l d Bank or “the Bank.” The evaluation units o f the WBG are the Operations Evaluation Department (OED) o f the Bank, the Operations Evaluation Group (OEG) o f IFC, and the Operations Evaluation Unit (OEU) o f MIGA. These units are independent o f WBG management andreport to the W B G ’ s Board through the Director-General, Operations Evaluation. Resource-rich and EI-dependent are used interchangeably for developing countries with average annual export values o f oil, gas and mineral products over 15 percent o f total exports. This standard was chosen with reference t o the WBG’s Poverty Reduction Sourcebook, w h i c h states: “A country’s m i n i n g sector can play an important role inpoverty reduction strategies if the approximate share o f the miningsector i s . . . greater than 10-25 percent o f export earnings.” F o r a l i s t o f countries meeting this criterion, see Volume 11, Annex B. Director-General, Operations Evaluation : Mr. Gregory K. Ingram Director, Operations Evaluation Unit : Ms. Aysegul Akin-Karasapan Task Manager : Ms. Ethel I.Tarazona EXTRACTIVE INDUSTRIESAND SUSTAINABLE - MIGA’s EXPERIENCE DEVELOPMENT Operations Evaluation Unit iv Acknowledgments The report was written by Ethel Tarazona, Stephan Wegner, and Roger Batstone under the general guidance o f Aysegul Akin-Karasapan, Director o f MIGA’s Operations Evaluation Unit (OEU). Richard Bemey, Alberto Pasco-Font, Felix Remy, and Dale Weigel prepared background papers and case studies for this evaluation. Photis Bourloyannis-Tsangaridis and Brian McKenna provided research assistance. Karalee Rocker and A l i m a Ngoutano-Njoya helped t o edit and format this report. An external advisory panel, consisting o f James Cooney, Cristina Echavarria, Arvind Ganesan, Michael Rae, and D a v i d Rice, provided valuable comments. EXTRACTIVE - MIGA’S EXPERIENCE INDUSTRIES AND SUSTAINABLE DEVELOPMENT Operations Evaluation Unit V Table o f Contents Pages Abbreviations and Acronyms ............................................................................................. e. 11 Definitions............................................................................................................................ ... 111 Acknowledgments ............................................................................................................... iv 1. Introduction..................................................................................................................... 1 Evaluation Methodology and Approach ................................................................................ -1 Portfolio Overview: MIGA Activities in the Mining and O i l & Gas Sectors.......................... 3 Cancellations o f MIGA E1Projects ........................................................................................ 5 Technical Assistance, Advisory, and Mediation Services; Claims......................................... 6 2 . Review of MIGA’s E1 Projects for Consistency with Safeguard Policies ..................7 Safeguard Issues Prior to Board Approval ........................................................................... 10 Safeguard Issues During Project Implementation ................................................................ 13 3 . Development Impacts of MIGA E1 Projects .............................................................. 18 Business Performance and Financial Sustainability: Low Metals Prices Suppressed Profitability of E I Projects .................................................................................................... 19 Economic Sustainability: Financial Performance Limits Economic Benefits ...................... 19 Private Sector Development: Supporting Countries’ PSD Agendas .................................... 20 . 4 MIGA’s Role in E1 Projects: Contribution. Effectiveness. and Staff Perceptions .22 MIGA ’s Contribution and Effectiveness ............................................................................... 22 Where Was MIGA’s Value Added Lowest? ........................................................................ 22 Where Was MIGA’s Value Added Highest?........................................................................ 23 Staff Perceptions ................................................................................................................... 24 5 . Findings and Recommendations .................................................................................. 26 Findings ................................................................................................................................ 26 Recommendations ................................................................................................................ -30 EXTRACTIVE INDUSTRIESAND SUSTAINABLE MIGA’s EXPERIENCE DEVELOPMENT . Operations Evaluation Unit vi Figures Figure 1. MIGA Guarantees Issuance in Mining and Oil & Gas...............................................3 Figure 2. MIGA Exposure in Mining Declining........................................................................ 4 Figure 3. Safeguard Consistency Ratings for MIGA Projects Show an Improving Trend ..................................................................... 10 Tables Table 1. Safeguard Consistency Summary for MIGA E1Projects at Board Approval ...........11 Table 2. Safeguard Consistency Summary for MIGA E1Projects Under Guarantee..............14 Boxes Box 1. A Company Learns How to Handle Social and EnvironmentalIssues ........................15 Box 2. Demonstratingthe Viability o f Mining ........................................................................ 21 Box 3: Main Messages from Reponses by MIGA Staff in WBG E1 Survey ........................... 25 Annexes EXTRACTIVE INDUSTRIESAND SUSTAINABLE Operations Evaluation Unit - MIGA’s EXPERIENCE DEVELOPMENT 1 1. Introduction 1. The Multilateral Investment Guarantee Agency (MIGA) has supported investments in extractive industries (EI) projects since i t s inception in 1988 by providing guarantees to foreign investors against political risks’ and, to a lesser extent, by offering technical assistance and advisory services. The involvement o f foreign investors in E1projects has the potential for great benefits to the host countries and can significantly contribute to the private sector development agenda o f resource-rich developing countries. At the same time, such investments have given rise, in some instances, to concerns about potential negative impacts o n environment and affected communities, as well as about the sustainability o f positive impacts. In that regard, MIGA, like the rest o f the World Bank Group (WBG), has come under increased scrutiny by its stakeholders in recent years. 2. In order to review the WBG’s past experience and to inform its future strategy for the sector, the WBG’s three evaluation units’ have conducted a joint evaluation of Bank Group activities in EI. This independent evaluation reviews the WBG assistance to the development o f E1 and i t s contribution to economic, social and environmental outcomes. The objective i s to evaluate the development effectiveness o f WBG activities in the E1sector and to draw lessons from the WBG experience to inform i t s future role in the sector. The study covers the process o f extracting oil, gas, coal, minerals and metals from the earth and their initial processing or concentration. The downstream utilization o f these resources or issues related to the global impact o f the consumption o f E1products were not e ~ a m i n e d .I n~ parallel to this joint evaluation, WBG management commissioned an external Extractive Industries Review (EIR) to advise the Bank Group o n i t s future role in EI, in response to stakeholder concerns. 3. This report by MIGA’s Operations EvaluationUnit (OEU) presents the findings of an evaluation o f MIGA guarantee projects in the E1 sector. Section 1 describes the evaluation process and criteria for evaluation and methodologies used. I t also presents an overview o f the characteristics and evolution o f MIGA’s E1portfolio. Section 2 assesses the consistency o f MIGA E1projects with environmental and social safeguard policies. Section 3 assesses the development impacts o f a sample o f evaluated E1projects. Section 4 reviews MIGA’s role and effectiveness in the E1sector. Finally, Section 5 presents conclusions o f the evaluation and makes recommendations for MIGA’s future involvement in E1projects. Evaluation Methodology and Approach 4. OEU’s evaluation activities for this joint evaluation consisted of: 0 An overview o f MIGA’s E1portfolio; 0 A review o f safeguard policy consistency for a sample o f MIGA E1projects4; 0 An update and validation o f previously evaluated projects; 0 Two case studies o f mining sector projects; and 1. The first guarantee issued by MIGA (1990) was in mining. 2. OED for the Bank, OEG for IFC, and OEU for MIGA. 3. See Joint OED/OEG Evaluation of WBG Activities in the Extractive Industries Sector -Approach Paper. p. 4 ff. 4. “MIGA project” refers to a MIGA-insured investment project. A single project may have several contracts o f guarantee, depending on the number of investorsilendersrequesting coverage, the type o f investment insured (equity, debt), and the risks insured (expropriation, war and civil disturbance, transfer restriction, breach of contract or a combination thereof). Since contracts of guarantee have a limited lifespan, the term “MIGA project” in this report also refers to a project that was insured by MIGA but for which coverage was either cancelled or has expired. EXTRACTIVE INDUSTRIESAND SUSTAINABLE Operations Evaluation Unit - MIGA’s EXPERIENCE DEVELOPMENT 2 0 A staff survey o f underwriters involved in E1projects. 5. The overview of MIGA’s E1portfolio covered 100 percent o f projects guaranteed inthe E1sector (with active and inactive guarantees) from FY90 through the first h a l f o f FY03 (December 3 1, 2002). These 3 1 projects (corresponding to 61 guarantee contracts) were used to describe the evolution and salient features o f MIGA’s E1p ~ r t f o l i o . ~ 6. The objective of the safeguards review was to assess the consistency o f MIGA guarantees inthe E1 sector since inception of operations in FY90 with current relevant environmental and social safeguard policies and the adequacy o f measures to mitigate adverse environmental and social impacts. OEU evaluated the consistency o f projects with MIGA’s interim safeguard policies and procedures at two points for each project, at approval and during implementation (under guarantee or, if the guarantee had been cancelled, at the time o f cancellation). 7. For the safeguards review, OEU selected a sample o f 12 MIGA projects6 in the E1 sector (or 39 percent o f E1sector projects with a total o f 26 guarantees) with characteristics representative o f MIGA’s E1 portfolio. Thus, OEU reviewed both early and more recent projects underwritten by MIGA, spanning a period o f 12 years (FY90-01). The sample consisted ofnine mining sectorprojects, ofwhich four were gold, one cobalt, three copper (/zinc), and one coal, as well as three o i l & gas projects. Projects in environmental categories “A” (nine) and “B” (three) were reviewed. The sample included projects in which other development institutions or insurers were involved (such as IFC, EIB, OPIC, EDC, and EFIC) and some in which MIGA was the sole participant. The review covered projects where MIGA guaranteed majority owners as w e l l as minority owners or lenders. Finally, the sample was balanced in terms o f projects with active guarantees (five) and those cancelled by the investor or lender (seven). 8. In addition to the safeguards review, OEU carried out a desk review to update and validate evaluations o f six miningprojects undertaken by MIGA’s former evaluation unit. These six projects, five gold mines and a facility extracting cobalt from tailings, had been visited inFY90-FY00. These relatively mature projects were underwritten by MIGA in the early to mid-1990s (FY92-FY96). This desk review, using the most recent information available, sought to address four evaluation criteria: (i) the project’s financial sustainability; (ii) the project’s economic sustainability; (iii)the project’s contributions to private sector development; and (iv) MIGA’s role and effectiveness. The update and validation consisted o f a review o f available information from MIGA underwriting and evaluation files and information available in the public domain relating to various aspects o f the projects. 9. OEU also undertook two evaluation case studies, both inLatin America, which involved site visits. The first case applied OEU’s new guarantee project evaluation methodology, including a cost-benefit analysis, whereas the second case study focused o n environmental, social, and community aspects. 10. Finally, OEU conducted a survey of a group of MIGA staff involved in underwriting EIprojects, soliciting staffs perceptions o n important issues in E1and obstacles to more MIGA involvement in the E1 sector to compare those perceptions with OEU’s findings from project evaluations. (OED and OEG have used the same survey to obtain views from World Bank and IFC staff,) 5. All 3 1 projects conform to the definition o f E1sector projects in the context o f this joint WBG evaluation, which i s consistent with the classification used by MIGA. 6. For one project selected for the review only a partial evaluation could be made (see paragraph 39). EXTRACTIVE INDUSTRIESAND SUSTAINABLE - MIGA’s EXPERIENCE DEVELOPMENT Operations Evaluation Unit 3 11. Altogether, OEU covered 15 out of 31 MIGA E1projects through either the safeguards review, validation and update, or case studies. This i s equivalent to 48 percent o f MIGA’s E1portfolio. Annex 2 provides an overview o f the projects reviewed by OEU. Portfolio Overview: MIGA Activities in the Mining and Oil & Gas Sectors 12. MIGA began supporting mining projects in 1990, at the start o f i t s operations. I nfact, the first two projects ever to receive MIGA coverage were in the mining sector, and in i t s first year o f operations, mining accounted for 76 percent o f MIGA’s aggregate liability. Figure 1. MIGA Guarantees Issuance in Mining and Oil & Gas OMlnlnQ ($M) Boil 8 Gas (SM) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002’ 2003” Fiscal Year * No guarantees Issued in El **As Of 1213112002 13. As o f December 3 1,2002, MIGA had insured24 mining and seven o i l & gas projects for a total o f 3 1 E1projects.’ (A complete list o f MIGA EIprojects since i t s inception can be found inAnnex 1.) MIGA was relatively active inmining inthe 1990s, but has not insuredmining projects since FYOl. By contrast, MIGA began insuring o i l & gas investments relatively late, in the mid-1990s (see Figure 1). In terms o f MIGA’s cumulative aggregate liability, mining has overshadowed o i l & gas (of the total liability issued in E1of almost $1.5 billion, miningaccounts for 74 percent and o i l & gas for 26 percent). Overall, 13 percent o f MIGA’s cumulative issued liabilities were in EI. As MIGA operations grew and it diversified i t s portfolio into other sectors, relatively fewer E1 projects were underwritten, and as existing coverage expired or was cancelled, the share o f E1inMIGA’s outstanding portfolio gradually decreased (see Figure 2). As o f December 3 1,2002, this figure dropped to approximately 11 percent (6.6 percent for mining and 4.3 percent for o i l & gas), or $552 million, in absolute terms. 7 . In total, MIGA issued 5 1 Contracts o f Guarantee in support o f 24 mining projects and 10 contracts for seven oil & gas projects. EXTRACTIVE INDUSTRIESAND SUSTAINABLE DEVELOPMENT - MIGA’s EXPERIENCE Operations Evaluation Unit 4 Figure 2. MIGA Exposure in Mining Declining MIGA Guarantees - Mining Projects as a Percentage of MIGA Total Gross Exposure 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Fiscal Year 14. MIGA coverage for miningprojects corresponded to an estimated foreign direct investment (FDI) o f $10.2 billion, and $5.1 billion for o i l & gas. The total FDI facilitated in E1 accounts for 32 percent o f the overall estimated FDI facilitated by MIGA since i t s inception. 15. Extractive industries projects, especially greenfield projects, often entail large capital investments. Even privatizations and modernizations, which represent about h a l f o f the miningprojects that MIGA has insured, required significant investments. This tends to produce a higher level o f MIGA exposure per project, $47 m i l l i o n o n average, compared with the MIGA average ($28 million). MIGA’s exposure ratio, measured as the share o f i t s gross exposure to the FDI facilitated by MIGAprojects, i s about 10 percent for E1(mining: 11percent, o i l & gas: 7 percent), whereas the overall ratio for MIGA i s 23 percent. MIGA has extensively used possibilities for reinsurance and coinsurance with public or private political risk insurers for i t s projects in the E1 sector, thereby limiting MIGA’s net exposure. 16. H a l f o f MIGA’s mining projects have been gold mines (12 projects), and another eight copper mines. In terms o f coverage issued, MIGA miningprojects have been concentrated in Latin America and the Caribbean (45 percent), and Africa (27 percent), followed by the transition economies in the former Soviet Union (16 percent). About h a l f o f the miningprojects in Latin America have been privatizations or expansions, whereas almost all other projects in other regions have been greenfield operations. All mining projects in Africa have been located in IDA-eligible countries. T w o more mining operations were located in IDA-eligible countries in Europe and Central Asia and Latin America and the Caribbean. 17. The majority o f o i l & gas projects insured by MIGA were new investments in existing production fields. Regionally, o i l & gas projects have been fairly evenly distributed, in t e n n s o f MIGA’s liability, between Latin America, Europe and Central Asia, Middle East and N o r t h Africa, and Africa, and have been evenly distributed between onshore and offshore fields. EXTRACTIVE INDUSTRIES DEVELOPMENT AND SUSTAINABLE - MIGA’s EXPERIENCE Operations Evaluation Unit 5 18. M I G A ’ s E1portfolio was concentrated in countries w i t h a higher risk profile since demand for MIGA coverage originates from investors’ unfavorable perception o f political risk in host countries. There i s often a correlation between the perceived risk in a country and governance, Le., political risks are likely to be more prominent in weaker governance environments. This in turn means that the need for MIGA guarantees i s higher in countries where governance tends to be weaker. While there are no generally accepted governance ratings, Transparency Intemational’s (TI) corruption perception index provides a proxy for one dimension o f governance in countries where MIGA had E1project guarantees. The 2002 T I rankings include 20 countries in which MIGA has had E1projects. The unweighted average score for those countries with MIGA E1involvement i s 3.58 (on a scale o f 0 to 10, with MIGA E1scoring from 1.9 to 7 . 9 , which i s identical to the average score o f all developing countries (79) covered by the corruption perception index. This means that MIGA E1 projects, o n average, were in countries where perceived govemance levels were similar to the average level in i t s developing member countries. Governance issues are important for EI-dependent countries and are addressed by the joint evaluation at both the sectoral and country level in the OED/OEG/OEU Overview report. 19. Since FYOO,’ MIGA has not supported any new miningprojects and it has insured only three new o i l & gas projects. While the reasons for this slowdown were not systematically assessedby this evaluation, it i s likely due to (i)a decline inthe number o f applications received by MIGA (signaling either a lack o f private investor interest or investment opportunities in these sectors given the fall in metal prices and other adverse global developments, or political risk insurance not being critical for their investment, or lack o f attractiveness o f MIGA instruments to investors), and ( i i)a need for more rigorous project assessments duringunderwriting, and thus delayed decision-making. MIGA may have been more carefid and selective as well, given that E1 sector projects often mean high underwriting costs, increased scrutiny, complex environmental and social issues, and some criticism by stakeholders or nongovernmental organizations with potential risks and implications for MIGA’s r e p ~ t a t i o n . ~ 20. A MIGA Contract o f Guarantee, the agency’s k e y legal instrument, i s issued for a period o f 3 to 15 years, subject to the needs o f the investor. Most contracts have a minimumduration o f 3 years after which the investor m a y cancel the guarantee o n the premium anniversary date, with 30 days advance notice to MIGA. Cancellations of MIGA E I Projects 21. As o f December 31,2002, 299 o f the cumulative total o f 619 contracts issued by MIGA (Le., 48 percent) remained active. In the extractive industries, 21 o f the 61 contracts (Le., 34 percent) were s t i l l active. These correspond to 11 projects out o f a total o f 31 extractive industries projects that obtained MIGA guarantees since 1990, implying a high cancellation rate o f 66 percent for MIGA E1projects. This i s most likely due to the relative seniority o f extractive industries projects (especially mining projects) in MIGA’s portfolio (most contracts have outlasted the three-year minimum contract period). 22. For those contracts in the extractive industries, associated with 20 projects in all, that were cancelled by investors or expired, the median time these contracts remained active was 4.0 years, with a range o f 0.66 to 7.25 years.” As o f December 2002, the oldest E1project in MIGA’s portfolio, a mining project, had been insured for 11 years. 8. Contracts o f guarantee issued in FYOl in mining were for existing MIGA projects. 9. Also see paragraphs 76-78 on results of MIGA staff survey. 10. The mean was 3.9 years and the standard deviation 1.55 years. EXTRACTIVE INDUSTRIESAND SUSTAINABLE - MIGA’s EXPERIENCE DEVELOPMENT Operations Evaluation Unit 6 23. Reasons for observed cancellations o f guarantee contracts for E1projects include, in decreasing order o f occurrence: (i) self-insurance (investors become comfortable with the host country political risk level, which means that the MIGA guarantee has served its useful purpose), ( iireplacement o f MIGA ) insurance with private or national insurers, ( iii) repayment o f loans, (iv) commercial failure o f the project enterprise, (v) transfer o f shares by the guarantee holder to investors who have not requested a guarantee from MIGA, and (vi) financial restructuring, leading to replacements o f existing contracts. Technical Assistance, Advisory, and Mediation Services; Claims 24. M I G A ’ s technical assistance and advisory services have had a strong focus o n mining and in the past have aimed at assisting countries in formulating strategies and techniques to attract FDI in the sector. The program consisted o f three core activities. The objective o f the first, capacity building, was to improve the effectiveness o f the host country’s mining promotion agencies through strategy workshops and policy seminars for government officials. Second, investment facilitation activities, including six conferences o n African MiningInvestment, brought together potential investors and government leaders to catalyze projects in Africa. Finally, in information dissemination, using a predominantly Internet-based approach (such as the Investment Promotion Agency Network [IPAnet]”), MIGA provided information o n mineral potential, policy and legislation, infrastructure, financial services, basic country information, investment opportunities “who’s who,” new developments, and geological maps. Since MIGA’s technical assistance and advisory services have not been evaluated, OEU i s not able to report o n the effectiveness o f these activities.12 25. MIGA has not received o r paid any claim related to an E1project. I t has mediated two investment disputes involving mines, in Angola and Ukraine, for investors without MIGA guarantees. 1 1, Accessible at www.ipanet.net or www.miga.org. 12. MIGA’s early work in this respect was cited in the Mining Journal (January 1997) as an important factor leading to the resurgence in mineral exploration and mining project planning in Africa in the mid 1990s. EXTRACTIVE INDUSTRIESAND SUSTAINABLE Operations Evaluation Unit - MIGA’s EXPERIENCE DEVELOPMENT 7 2. Review o f MIGA’s E1 Projects for Consistency with Safeguard Policies 26. This section summarizes the findings o f a review to assess the con~istency’~ o f MIGA’s extractive industry projects with current applicable environmental and social safeguard policies, and the adequacy o f measures to mitigate adverse environmental and social impacts. l4 This evaluation has focused o n safeguard policies because the project’s environmental and social performance i s one o f the most critical aspects o f E1 projects, and a failure to comply with applicable safeguards may have negative impacts on communities and the environment, thus undermining MIGA’s development mandate. The section identifies specific issues emerging fkom the sample o f projects reviewed in relation to: (i) the application o f the safeguards to the private sector; (ii)MIGA’s unique mandate (within the WBG), as an insurer o f political risks; and ( iii) the adequacy o f the safeguard oversight fkamework that has been adopted by MIGA management. The review i s based o n a comprehensive evaluation methodology that was developed and tested ina parallel OED study. I t covers a sample o f 12 MIGA E1projects inthe mining and o i l & gas s e c t o r ~approved ’~ between FY90 and FYO1. 27. MIGA’s framework for assessing the compliance o f i t s guarantee projects with environmental policies and guidelines has evolved significantly over time. Prior to adopting i t s o w n policies and guidelines, MIGA applied W o r l d Bank environmental and social policies16and guidelines to i t s projects, since i t s inception. An internal document indicated that MIGA had committed to “ensure that [its projects] conform to the environmental standards adopted by other members o f the W o r l d Bank Group” since 1991 and initially did so using specialized IFC staff. The creation o f an in-house environmental unit by MIGA in late 1997 was an important milestone for improving the Agency’s capacity to address environmental issues. This unit has been responsible for setting up in-house procedures, formulating and revising policies, undertaking project assessments and selective monitoring.” In M a y 1999, the Board approved MIGA’s o w n specific environmental assessment (EA) and disclosure policies and procedures that reflect i t s business as an investment insurer for the private sector. They took effect with all new definitive applications received after July 1,2000. InM a y 2002, MIGA’s Board approved the adoption o f i t s o w n interim issue-specific Safeguard Policies. MIGA’s Web site’* notes: “In carrying out its review and evaluation, MIGA considers: ~ ~~ 13. Since MIGA had not officially adopted its own safeguard policies from its inception, it i s more appropriate to evaluate the “consistency” o f its projects with these polices rather than “compliance.” 14. Based on a review of MIGA E1projects’ consistency with safeguard policies undertakenin conjunction with this evaluation. 15. Nine mining and three o i l & gas projects, with one project undergoing incomplete review (see paragraph 39). Therefore, graphs in this section present the results for 11 projects. 16. The World Bank has 10 safeguardpolicies, o f which seven are covered in the present review: (OPIBP 4.01, Environmental Assessment; OP 4.30, Involuntary Resettlement; OD 4.20, Indigenous Peoples; OP 4.04, Natural Habitats; OP 4.37, Safety of Dams; OPN 11.03, Cultural Property; and OPIBP 7.50, Projects on International Waterways. The following three policies are not covered in the present review: OP 4.09, Pest Management; OP 4.36, Forestry; and OPBP 7.60, Projects in Disputed Areas. 17. Shortly after MIGA obtained its in-house environmental expertise, a review o f the portfolio was conducted to identify high-risk projects from an environmental and social standpoint, as well as priorities for potential monitoring site visits. 18. In its description of Framework for Safeguard Policies at M I G A . EXTRACTIVE INDUSTRIES - DEVELOPMENTMIGA’s EXPERIENCE AND SUSTAINABLE Operations Evaluation Unit 8 0 the project’s ability to comply with the appropriate guidelines found in the World Bank Group’s Pollution Prevention and Abatement Handbook; 0 compliance o f the project with host country environmental requirements; and 0 consistency o f the project with MIGA’s safeguard policies regarding the following specific issues: natural habitats; forestry; pest management; dam safety; projects o n international waterways; involuntaryresettlement; indigenous peoples; and physical cultural resources.” 28. Until late 1997, I F C environmental and social specialists were used to review MIGA projects for WBG safeguard policy consistency, as MIGA did not have i t s own in-house capacity due to i t s small size.Ig Even after MIGA’s environmental unit was created, IFC experts continued to be called upon for their advice o n certain projects. In some mining projects that were reviewed, IFC was also an investor and/or lender and MIGA deferred to IFC experts o n safeguard compliance matters in such cases. From an evaluation perspective, including projects for which IFC experts carried out MIGA’s due diligence has provided valuable insights into the functioning o f this earlier arrangement and i t s efficacy for MIGA, which could also be useful for future MIGA projects in which IFC m a y be involved. 29. The WBG safeguard policies contain a long l i s t o f requirements. For the purposes o f this independent evaluation o f consistency o f MIGA projects with safeguard policies and guidelines, a set o f basic criteria was developed reflecting key policy requirements and the necessary steps involved in meeting them. These criteria are summarized in Annexes 3a and 3b. This approach i s similar to the one developed and used for a sample o f World Bank E1projects by OED2’in evaluating the compliance with WBG safeguards policies. They are based o n MIGA’s o w n specific environmental assessment and disclosure policies and procedures, as w e l l as the interim issue-specific safeguards,*’ as approved by MIGA’s Board in 1999 and 2002, respectively, which differ somewhat from those o f the World Bank to reflect MIGA’s business model. MIGA’s 2002 safeguards have adapted World Bank safeguards to the private sector. This has involved some simplifications and clarifications and in n o case a tightening o f W o r l d Bank Safeguards. 30. This review was the first o f i t s kind for MIGA projects and was undertaken to determine the status o f a representative sample o f E1projects o n environmental and social fronts, using current standards. Using the most recent MIGA policies as criteria for consistency, rather than WBG policies and guidelines in effect at the time o f approval o f guarantees, enabled OEU to review the entire sample using the same criteria. OEU recognizes that the application o f the safeguard policy framework has evolved considerably in MIGA since issuing the first guarantee in 1990, and that not all o f the policies had the same degree o f specificity. Furthermore, the Bank’s and MIGA’s procedures evolved over time as well. MIGA, as a member o f the WBG, had subjected itself to WB policies and guidelines since the inception o f the Agency and more explicitly since 1991,22 prior to adopting i t s o w n policies. Therefore, all projects covered by t h i s review were subject to the WB policies at the time o f their Board approval. MIGA’s Board had the expectation that the projects i t concurred with were fundamentally consistent with applicable WB policies and guidelines. For reasons o f methodological soundness, this report does not refer to compliance (in its 19. IFC or WB environmental and social specialists reviewed 10 out o f 12 projects covered in t h i s safeguards review. 20. Roger J. Batstone: Review of Implementation of Safeguard Policies of World Bank Extractive Industries Projects. OED Background Paper. World Bank. 2003. 21. A list o f MIGA safeguard policy triggers i s shown in Annex 4. 22. See paragraph 27. EXTRACTIVE INDUSTRIESAND SUSTAINABLE Operations Evaluation Unit DEVELOPMENT - MIGA’s EXPERIENCE 9 strict or legal meaning) across a period o f 12 years (MIGA’s operational history) but rather i t assesses their consistency. The intention o f this study was to learn about the extent to which MIGA E1projects were (and are) consistent with current applicable MIGA safeguard policies and guidelines. This approach also reflects the forward-looking nature o f this evaluation and can inform decisions about possible future E1projects MIGA m a y be involved in. 3 1. The review focused o n consistency with Safeguards at two phases in the guaranteed investment cycle: Consistency with Safeguards at Board Approval: T o what extent did the guaranteed investment comply or agree w i t h the requirements o f the current MIGA safeguard policies and guidelines at the time o f Board approval? 0 Consistency with Safeguards under Guarantee: To what extent did the project fulfill or agree w i t h the conditions and requirements o f the safeguard policies and guidelines (as currently in force) during investment implementation and adequately implement the safeguard management/action plans that had been identified at approval? 32. The review found that 73 percent o f the E1projects in the sample were substantiallJ3 consistent with current MIGA safeguard policies at the time o f MIGA Board approval. This ratio increased to 88 percent during implementation, while the project was s t i l l under guarantee or at the time o f cancellation o f the guarantee. Moreover, safeguard policy consistency showed an improving trend over the period o f 1990-2001 for the sampled projects, for both stages -at approval and during project implementation (see Figure 3). ~~ 23. OEU rated consistency with safeguard policies using a scoring system with four categories: negligible, modest, substantial, and high, as defined in Annexes 3a and 3b. Projects were substantialZy consistent when the “set o f requirements generally was met, or expected to be met, with only minor shortcomings.” EXTRACTIVE INDUSTRIESAND SUSTAINABLE Operations Evaluation Unit DEVELOPMENT - MIGAs EXPERIENCE 10 Figure 3. Safeguard Consistency Ratings for M I G A Projects Show An Improving Trendz4 1999 -Adoption of MIGAs T Environmental Policies & Procedures High 0 E J Modest z 0) u) Negligible 1 4 Board Date 1989* 1992* 1994' 1995' 1996' 1996' 1997 1997' 1998 1999 2001 1 -Approval -Implementation -Linear (Implementation) --- Linear (Approval ) 1 Guarantees for projects noted with an asterisk (*) are no longer active. Safeguard Issues Prior to Board Approval 33. For 82 percent o f the projects the environmental assessments (EAs), including analysis o f altematives and baseline studies, were w e l l prepared by the time o f Board However, this has not always translated into well-prepared Environmental Management Plans (EMPs) or Environmental Management System (EMS) provisions inthe sponsor's project organization and contracting arrangements 24. While one guarantee project was approved by MIGA's Board in 1992 to cover the initial stages o f project development, OEU's assessment o f the consistency with safeguard policies was based o n documents available when the project was approved by IFC's Board in 1996, as the scope and design o f the project changed appreciably between 1992 and 1996. Assessment ratings were based o n the full feasibility study and comprehensive EA, which were completed in 1995. MIGA Management notes that if this unique case was excluded from the scoring in Table 1, the ratings would have been significantly higher in many categories. OEU notes that it has selected a representative sample covering 39 percent o f MIGA guaranteed projects, and including various types o f partnerships and arrangements for MIGA guarantees. 25. Assignment o f environmental categories (A or B) was appropriate for all sampled projects, with the possible exception o f one project N which documentation was incomplete (see paragraph 39). EXTRACTIVE INDUSTRIES DEVELOPMENT AND SUSTAINABLE - MIGAs EXPERIENCE Operations Evaluation Unit 11 during construction, which are the principal means for operationalizing the protective measures proposed under the EAs. The main problems o f safeguard consistency identified at approval (see Table 1and Annex 5a) are (i) poor public consultation and disclosure in approximately h a l f o f the projects; (ii) inadequate provisions for safeguard compliance in Contracts o f Guarantee in more than two-thirds ofthe projects; and ( iii)deficiencies in application o f issue-specific safeguards, where relevant, such as: Involuntary Resettlement (two-thirds o f the projects); Indigenous Peoples (in all projects); Natural Habitats (in two- thirds o f the projects); and Dam Safety (a quarter o f the projects).26 Applicable to Addressed Substantially o r Higher Criterion (No. o f Projects) (Percent of Projects)* - Comprehensive Environmental 11 82% - Assessment Comprehensive Environmental and 11 82% - Social Baseline Survey Comprehensive D a m Safety Measures 4 75% - ,Proposed Adequate Environmental Action Plan 11 73% - Proposed Adequate Analysis o f Feasible 11 73% Alternatives Project Sponsor’s Environmental 11 64% Management System Adequate Public Disclosure/Consultation 9 56% - .Addressed I I- Comprehensive and Implementable Resettlement PladCommunity 33% - Development Program Prepared Natural Habitats Protected or Offsets 6 33% Provided Contract o f Guarantee for Implementation o f Safeguard 11 27% PoliciedGuidelines Adequate Comprehensive and Implementable Indigenous Peoples Plan Prepared 3 0% 34. The projects reviewed included cases where: (i) specific safeguards were not explicitly identified in the documents in the files, or were identified late in project processing (sometimes even after Board approval); (ii) instructions given to clients regarding specific safeguard requirements were not clear; ( i ii) 26. MIGA Management notes that there i s clear documentation in the f i l e s that shows that all the key concerns o f the Indigenous Peoples Policy and the Involuntary Resettlement Policy were addressed at the planning level, at the minimum, in well over half o f the applicable projects. EXTRACTIVE INDUSTRIES DEVELOPMENT AND SUSTAINABLE - MIGA’S EXPERIENCE Operations Evaluation Unit 12 requirements were not adequately communicated to consultants preparing EAs; and (iv) internal documents and clearances for Board approval were not sufficiently clear about which safeguard policies or environmental guidelines were applicable. The more common reasons for these problems identifiedby the review were (i) MIGA getting involved too late into the process; (ii) lack o f social sector expertise in identifying applicable safeguards; (iii) underwriters not having the experience o r necessary background leading to poor initial communications with clients before environmental staff got involved; (iv) institutional pressures to meet guarantee volume objectives for the fiscal year, which m a y have prevented some critical environmental verification (e.g., updating previous clearances iftime elapsed was significant, additional site visits when needed); and (v) changes in project scope and design between Board approval and issuance o f Contracts o f Guarantee without h r t h e r safeguard evaluation. The potential value added MIGA could provide tends to be downplayed at the underwriting, and marketing, stages o f a prospective guarantee. I t i s unclear why in some o f the projects reviewed safeguard policies were not triggered early enough in the underwriting p r o c e s s - o r not triggered at all. Reviewed projects also provide some positive examples suggesting that when safeguard policy issues are handled expeditiously and efficiently with clients, MIGA’s intervention provides “value added” and a “level o f comfort.” 35. The EAs that were reviewed varied in quality from relatively mediocre to the highest international standard. The scope and comprehensiveness o f 82 percent o f the EAs reviewed met basic MIGA requirements as outlined in Annex 3a. Some were developed over several years with many refinements and improvements added in the process and included extensive inputs from a variety o f independent experts and reviews by competent regulatory authorities as well as project-affected communities and NGOs. Cases were noted where MIGA (or IFC) experts provided important inputs during the process o f EA review, which considerably improved their quality. There were other examples where their inputs were too late and had to be addressed after project approval. Inone case, independent consultants hiredby the major lenders identified a long l i s t o f deficiencies in the EA, which was initially prepared by one o f the investors. 36. Addressing Mine Closure. The main issue in the application o f the 1995 Mining and Milling Guidelines - Open Pit noted during the review was the requirement for preparation o f a M i n e Closure and Restoration Plan. I t was not clear in the guideline when such a plan had to be prepared, at what level o f detail, and when the investor needed to start accumulating fhds for mine closure (as required in the later 1998 version o f this guideline). In some o f the cases reviewed, the plan was required at the time the EA was prepared, but in others i t was not until later duringproject implementation that MIGA (or IFC) made it clear that the plan was needed. Some clients argued that it was too early for them to prepare such plans at the final feasibility stage and include them in the EA, while others recognized that mine reclamation should be a progressive process and incorporated into the mine development plans (as well as financial plans) to minimize costs and reduce environmental (and social) impacts. Inthese cases, the plans were revised and adjusted during the operational phase as more experience was gained. 37. Public consultation and disclosure o f environmental and social impacts was one o f the weakest areas o f safeguard consistency for the reviewed projects, with only about h a l f substantially meeting MIGA’s requirements.” In some projects MIGA and IFC experts took great care to ensure that the clients 27. MIGA’s EA disclosure policy requires that: “For all Category A projects during the environmental assessment process, MIGA will require the project investor to consult, or to have consulted, project-affected groups and local nongovernmental organizations about the project’s environmental impacts, and to take their views into account. The project investor should initiate such consultations as early as possible, and consult with such groups throughout project implementation, as necessary, to address project-related environmental and social issues that affect them.” There i s n o requirement for public consultation in MIGA-approved Category B projects. EXTRACTIVE INDUSTRIESAND SUSTAINABLE Operations Evaluation Unit - MIGA’s EXPERIENCE DEVELOPMENT 13 were aware o f their EA public disclosure obligations. In other cases, insufficient guidance was provided and as a result too l i t t l e attention was given to this matter. Some EAs were deficient in describing the public consultation process, while others were forthcoming and noted improvements that resulted f i o m the process. Cases were noted where project decisions had already been made and the public disclosure process was seen as apro-forma exercise, defeating the purpose o f the MIGA policy. There were no cases where the MIGA disclosure policy delayed guarantee processing. 38. The review found that only a third o f the projects had adequate provisions for safeguard enforcement in the Contracts o f Guarantee,28although even these did not refer to the individual safeguards that applied. In three more recent cases the specific applicable Environmental Guidelines were indicated and attached to the contracts. The review o f clearance memos also indicated a lack o f clarity o n the specific safeguard policies that applied to projects prior to approval. Only in a few cases has MIGA included any specific environmental and social reporting requirements by i t s clients in i t s contracts. 39. OEU did not include ratings for one project selected for the safeguard review due to lack o f relevant information to verify the adequacy o f the project’s environmental classification. MIGA Management has taken action to provide the documentation and OEU will complete the review o f this project upon receipt o f the relevant documents. Safeguard Issues During Project Implementation 40. As noted above, there was notable improvement in the safeguard performance o f the sample o f extractive industryprojects during their implementation (see Table 2 and Annex 5b). O f particular note i s the high level o f performance: (i) in implementing EAP/EMPs; (ii) in carrying out environmental and social monitoring2’ ( iii) in operating Environmental and Health and Safety Management Systems; and (iv) generally improved consistency w i t h specific safeguard policies, with the exception o f the natural habitats policy. Public consultation and disclosure, a k e y area, continued to fall short o f good practice in a third o f the projects reviewed, in particular in three Category A projects underwritten before F YO O, when MIGA’s Environmental Review Procedures and Disclosure Policies went into effect. Reporting o n safeguard policy consistency by clients and monitoring and evaluation by MIGA could also be improved. 28. MIGA’s General Conditions o f Guarantee have been revised over the course of the period that MIGA has been in existence and hence, over the period that i s covered by the projects under review. For all guarantee issued since 1999, MIGA has the right to terminate the contract if the project does not comply with MIGA’s environmental policies and guidelines. 29. Due mainly to monitoring requirements o f senior lenders and other bilateral insurance agencies. EXTRACTIVE INDUSTRIESAND SUSTAINABLE - MIGA’s EXPERIENCE DEVELOPMENT Operations Evaluation Unit 14 Table 2. Safeguard Consistency Summary for MIGA E1 Projects Under Guarantee (Based o n Review o f 11 MIGA E1Projects) Applicable t o Addressed Substantially or Higher Criterion (No. o f Projects) (Percent o f Projects)* EnvironmentalAction PladEnvironmental Management Plan 8 100% Fully Implementedby Sponsor Environmental and Social Monitoring Fully Implementedby Sponsor 8 88% Sponsor’s Project Implementation EnvironmentalManagement System 8 88% Effective Resettlement PladCommunity IDevelopment Program Fully I 7 I 86%1 - Implemented Full Compensation o f Project Affected - 6 83% People Cultural Property Protected - 6 83% Dam Safety Measures Implemented 4 75% - Indigenous Peoples Plan Fully 3 67% - Implemented Continuing Public Disclosure and 8 63% Consultation Reporting on Safeguard Policies by - 10 60% Sponsor Adequate Monitoring and Evaluation o f Safeguard Policies by MIGA Adequate 10 60% Natural Habitats Protected or Offsets 6 50% Provided loverall Safeguard Consistency I 8 I 88%1 Note: Four projects could not be reviewed as no monitoring reports were on file. * Four rating categories were used: negligible, modest, substantial, and high. See Annex 3b for details, 41. The most important factor in ensuring safeguard compliance i s a committed investor with the capacity to implement the environmental, health and safety, and social mitigation and monitoringprograms that are required under the project and spelled out in the EAs. 42. One case illustrated what can go wrong if management and organizational structure set up for project management during the construction phase become too autonomous and disconnected from the environmentally and socially responsible policies and procedures o f the individual investors, but also that a company can learn from experience. I t was only after receiving public complaints against the project that MIGA came to realize the seriousness o f the situation and fielded a mission to assist the investor in restoring i t s public image and helping i t to act as a responsible corporate citizen. This case also clearly illustrates both MIGA’s positive contribution in this process and the need for MIGA to take a more EXTRACTIVE INDUSTRIESAND SUSTAINABLE DEVELOPMENT - MIGA’s EXPERIENCE Operations Evaluation Unit 15 proactive approach in evaluating clients’ organizational and management arrangements to satisfy itself that they are adequate for implementing responsible environmental and social policies f r o m the very start o f project construction. Risks and costs associated with consequences f o r inadequately addressed social and environmental issues, for b o t h MIGA and the investors, are high and increasing throughout the l i f e o f the project (see Box 1). Box 1. A Company Learns How to Handle Social and EnvironmentalIssues The evolution o f this project’s handling o f social and environmental issues, and MIGA’s role in the process, provides important lessons. During the early construction phase o f 1998-99, priority was given to earliest possible project completion and cost efficiency. The contractor coordinated only with the Project Management side and had n o line o f communication with the company’s Operations side, which was responsible for the eventual operation o f the miningfacility, including environmental protection and communityrelations. As a result, concerns and messages coming from the company’s Operations side during the construction phase were not addressed by the Project Management, resulting in a gap between expectations of the local community and actions of the project. I t also . generated several social and environmental problems: An accelerated resettlement program o f over 40 indigenous families carried out inadequately during March and April 1999, which led to social discontent, was a clear indication that a culture o f social responsibility had not . yet permeated project management and organization. In terms o f governance, not much effort was devoted to strengthening local organizations. a Economic linkages to the local economy were not activated as no initiatives were taken to implement programs . o f local employment, training, or procurement. N o appropriate mechanism was implemented to ensure timely advice to those communities and persons that received substantial amounts o f money for their land in a non-cash economy. This situation led to complaint letters to MIGA, which sent a mission to the field to investigate the matter in M a y 2000. Reacting to the widespread dissatisfaction in neighboring communities, the company began worlung on community relations and took corrective action in early 2000. MIGA’s involvement at this precise time appears to have had a positive effect, changing the priorities and attitude o f project management with respect to community and environmental issues. However, the management structure was only modified after project construction was completed in mid-200 1. In mid-2002, one year after production start-up, the company implemented a new organizational structure more consistent with the social and environmental concerns o f a modem mining company. Under the new structure, the CEO i s responsible for the operational, financial, and environmental aspects as well as community relations. This new unified structure facilitates coordination and team work among different departments and the articulation o f a common objective for operational and social and environmental areas. I t should enable the company to address environmental and social issues more proactively in the future. 43, EMPs/EAPs. Environmental and social action plans are the k e y outputs f r o m the preparation and approval stages o f MIGA projects. There are good examples among MIGA projects reviewed where these action plans have been taken seriously by investors -usually those in w h i c h the investors were directly involved in their preparation and finalization. There were other cases where the action plans were prepared by independent consultants without full endorsement by investors. EMP/EAE% were substantially implemented by a l l o f the investors f o r the projects reviewed, in some cases with persistent prodding by MIGA’s (or IFC’s) environmental and social experts. Some investors incorporated the EMPs into their EMS monitoring and auditing programs to ensure that they were h l l y implemented. In such cases variances from the plan were noted, as were action plans drawn up to fblfill these requirements. 44. L a n d acquisition and resettlement was substantially accomplished according to the requirements o f MIGA’s involuntary resettlement p o l i c y in 86 percent o f the projects reviewed. This was a great EXTRACTIVE INDUSTRIES - DEVELOPMENTMIGA’s EXPERIENCE AND SUSTAINABLE Operations Evaluation Unit 16 improvement over the situation at project approval when only 33 percent o f the projects had adequately prepared resettlement plans. It reflects a conscientious effort by MIGA (and IFC) to bring these projects into conformance with the social safeguard policies during the implementation phase. However, there were deficiencies in applying the policies, which should be noted for future reference and attention. In regard to those projects where land acquisition and resettlement occurred before MIGA involvement, the policy requires monitoring and evaluation o f i t s implementation and then, upon completion, an assessment o f the outcomes to see if the objectives o f the policy have been met in the process. This was not carried out. 45. In two-thirds o f the projects, investors were active in implementing community development activities to mitigate the impacts o f their operations on local communities. Inprojects where IFC was also involved, i t promoted these activities to investors, while MIGA played a critical catalytic role in one project. The community development programs have focused on improving services inproject-affected communities, such as health, education, and water supply and sanitation services, and have promoted economic development, including job creation, training, and credit for small-scale business activities and improved agricultural practices. 46. With regard to other specific safeguards, closer attention by investors to indigenous peoples’ issues during implementation resulted in substantial consistency intwo o f the three projects with the requirements o f this safeguard policy. Tailings dam safety has been a concem that has been highlighted by well- publicized failures, so i t i s not surprising that most miningcompanies are sensitive to this issue and take it seriously. Seventy-five percent o f the projects reviewed with dam heights in excess o f 10 to 15 meters were substantially consistent with this safeguard policy at Board approval, as well as during implementation. The most serious concems during implementation were leaking dams and sealing problems at abutments, which required pump-back o f the leaked tailings water; failure in one case to remove trees and tree roots from the tailings impoundment, which compromised the integrity o f the dam foundations; poor construction practices without adequate supervision; and poor operating practices allowing ponding in front o f dam walls. One o f the mining projects previously evaluated by MIGA experienced a tailings dam failure while under MIGA guarantee, releasing large quantities o f cyanide- contaminated water into a downstream river system. In this case, MIGA was a reinsurer and it lacked the legal ability to apply and monitor i t s safeguard p ~ l i c i e s . ~ In’ another instance, crates o f cyanide f e l l into a river in a traffic accident while being transported to the mine site. Since these incidents, MIGA has paid closer attention to safety matters in the transportation o f hazardous substances for E1projects. 47. The only safeguard for which the consistency outcomes were not appreciably improved during implementation was the natural habitats policy. Only h a l f o f the projects substantially conformed with this policy during implementation, although action was being taken by one additional project to meet the requirements when i t was prematurely shut down and put o n a care and maintenance basis. 48. The review also found that three MIGA-guaranteed projects were vulnerable to social unrest, which m a y have been exacerbated by security-related incidents leading to claims o f security-related violations o f individual rights. In those three projects, MIGA did not separately consider issues related to conflict inthe context o f the projects as part o f i t s underwriting. However, MIGA’s development mandate encompasses a 30. The reinsurance agreement covering t h i s project pre-dates the current reinsurance practice by which MIGA’s environmental and safeguard policies must be adhered to if MIGA i s to act as an reinsurer. In particular, MIGA will require that the primary insurer change i t s contract wording, if necessary, to meet MIGA’s standards. All current MIGA reinsurance contracts include MIGA’s right to terminate the reinsurance contract if the investor i s not in compliance with MIGA’s environmental and social policies and guidelines. EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - MIGA’S EXPERIENCE Operations Evaluation Unit 17 concern for such potential negative impacts on individuals in host countries. This i s also a political risk issue with the potential to affect both the project (increased conflict) and MIGA (claims brought under war and c i v i l disturbance coverage, as well as reputational risk). Another MIGA project entailed a dispute with a neighboring country regarding ownership o f the resource. MIGA treated this issue thoroughly in i t s political risk asse~sment.~’ 49. The variety o f reporting mechanisms that were noted in the projects provide good lessons o n the quality and usefulness o f the information provided for assessing environmental and social risks and safeguard consistency o f projects under guarantee. Examples o f good reporting were provided by (i) independent experts hired by senior lenders; ( iiindependent auditing experts hired by the investor; (iii) ) investor head-office auditing teams; (iv) monthly or quarterly reporting by clients to lenders and MIGA; and (v) MIGA and I F C environmental and social specialists in mission reports and intemal memos. MIGA does not require Annual Monitoring Reports (AMRs) from i t s clients. Reporting o n social impacts and compliance with social safeguards continues to be weak inMIGA’s reporting system, although there were some good examples in the case studies o f independent auditing o f involuntary resettlement and indigenous peoples plans. 50. There was a frequent and steady flow o f monitoring reports from clients or independent consultants hired by senior lenders or bilateral investment insurers in 60 percent ofprojects reviewed. In about half o f the projects MIGA benefited from an independent review o f the project EA by consultants hired by senior lenders or bilateral investment insurers. The independent review requirements o f the senior lenders and bilateral investment insurers focused only o n the environmental and health and safety aspects o f the proposed investments, except in one case in which social issues were also addressed. Innone o f the cases did MIGA hire outside independent expertise to carry out i t s due diligence work o n the projects reviewed, relying o n the investor, or other extemal agencies to finance this work. The downside to this arrangement i s that MIGA does not have any control o f the scope o f the consultants’ work, the quality o f the consultants hired, or the frequency and timeliness o f their reporting. The main deficiencies in the independent assessments have been o n the social issues, except in a few cases where such expertise has been specifically hired by investors to evaluate their resettlement and social programs. There were no monitoring reports in MIGA files for one category A project and one category B project, even though they had been under implementation for more than three years. 51. MIGA has limited in-house capacity to adequately monitor and influence social safeguard outcomes. For the sampled projects where IFC was involved in the financing arrangements, MIGA delegated monitoring o f environmental and social aspects to IFC, which carried out a systematic supervision o f the projects, including site visits (on behalf o f both MIGA and IFC). Social specialists have been involved in field visits from the beginning o f project processing in only one case. The observed pattem has been a delayed involvement (including field visits), often after Board approval, resulting in increased project cost and delays as w e l l as generating dissatisfaction among project stakeholders. Investors have benefited considerably from environmental and social specialists’ site visits and advice in IFC/MIGA projects. Investors have expressed their appreciation for these inputs, inparticular for dealing with land acquisition, resettlement, and community development issues, where the WBG has substantial experience and competitive advantage. 3 1. Unlike the World Bank, MIGA does not have a Projects in Disputed Areas safeguard policy. EXTRACTIVE - INDUSTRIES AND SUSTAINABLE DEVELOPMENT MIGA’S EXPERIENCE Operations Evaluation Unit 18 3. Development Impacts o f MIGA E1 Projects 52. The findings on the development impacts o f MIGA E1projects presentedin this section are drawn f r o m six MIGA projects in the E1sector evaluated between FY99 and FYOO and one case study conducted in FY02-03. The six have been updated and validated through a desk review to arrive at rating categories consistent with OEU’s new evaluation methodology, whereas the case study applied this new methodology for the first time to a project e~aluation.~’ 53. All projects, most o f them gold mines (and one copper and one cobalt extractiodprocessing), were approved in the early to mid-l990s, when gold prices were higher than $350 per ounce. Metals prices, including gold, fell precipitously in the second h a l f o f the 1990s. The price o f gold fell to below $300 per ounce toward the end o f the 1990s, greatly reducing, and in some cases totally eliminating, returns to equity investors. 54. Quality of underwriting and risk assessment: An analysis o f the underwriting o f the seven projects found that MIGA’s assessment o f the projects’ financial viability was generally thorough andbased on the best information available from the clients at that time, although assumptions on metals prices, volume, and quality proved to be optimistic. All seven project assessments also provided an estimated economic rate o f return (ERR), but none o f the cases explained the underlying assumptions o f the ERR calculation, so that i t was not possible to judge their validity (or calculate a comparable ex-post ERR). Some instances were noted where backward linkages appeared somewhat overestimated (e.g., in the purchases o f fuel or electric power, where value added i s extremely low), as was the case for infrastructure improvements (some deterioration in infrastructure was neglected, whereas other improvements had very little impact due to the remoteness o f the location). In another case, credit was claimed for health and educational services available only to employees, which i s considered a standard compensation package. On risk assessments, a l l project analyses went into substantial detail o n the three major political risks MIGA insured and most o f the problems related to these risks were fully identified and appraised. However, there was no discussion o f the potential risk from a l o w financial return if the government owned a significant share o f the company (one project). 55. In general, during the underwriting o f the reviewed projects, there was a compartmentalized approach defined by the source o f the information. For example, financial analysis and projections as well as anticipated economic data were provided by investors, partial development analysis was carried out by MIGA underwriters, environmental and social issues were addressed by investors with MIGA inputs, and risk analysis was undertaken by MIGA underwriters. E1projects reviewed were complex, involved large investments and revenues for the host govemments and had important environmental and social implications; subjecting them to close public and international scrutiny. Thus, they required a more up- front and in-depth analysis and a holistic understanding o f financial, economic, social, and environmental aspects from a developmental perspective. 56. The Risk Management Committee (RMC) established as a result o f the Guarantees Business Process Review undertaken in 1998, brings together guarantees, legal, environmental, financial, and risk aspects during the decision-making stage for potential guarantees. While it has provided a forum for the 32. The new evaluation framework approved by CODE in 2002 introduces systematic cost-benefit analysis to the evaluation o f individual guarantee projects and harmonizes evaluation standards with those used by OEG. The development outcome o f guarantee projects i s evaluated in four different categories: Business Perfonnance o f the project, Economic Sustainability, Environmental and Social Impact, and Impact on Private Sector Development. O E U uses the following rating scale: Satisfactory, Moderately Satisfactory, Moderately Unsatisfactory, and Unsatisfactory. EXTRACTIVE INDUSTRIESAND SUSTAINABLE DEVELOPMENT - MIGA’S EXPERIENCE Operations Evaluation Unit 19 discussion o f many aspects o f the newer E1projects covered in this evaluation, these discussions are not adequately informed by full assessments o f the social issues and developmental impacts frequently encountered in complex projects in the E1 Business Performanceand FinancialSustainability:Low Metals Prices Suppressed Profitabilityof E1 Projects 57. Financial returns in a l l seven projects were affected by the fall in metals prices. In assessing financial benefits, all projects had assumed that metals prices would remain stable over the project lifetime. The commodity price margins within which the projects were expected to be profitable widely varied. Only one o f the projects was s t i l l financially profitable at the gold prices that prevailed during the latter part o f the 1990s and through mid-2002. The evaluated cobalt project was hit hardest and placed o n care and maintenance in late 2002 until such time as the metal’s price returned to near i t s pre-project level. T w o o f the evaluated projects had moderately satisfactory ratings for financial sustainability; two were rated moderately unsatisfactory, and three had an unsatisfactory rating. 58. Revenues to host governments from equity holdings have been disappointing and little is known about their use. L o w metals prices, coupled with significant cost overruns andor lower-than-anticipated ore quality in some projects, resulted in l o w financial returns to equity holders. In cases where governments held equity in compensation for providing a proven gold reserve, this has had a profound nat least some impact o n their return to equity and expectations o f significant revenues were not fulfilled. I cases, governments have been aggrieved that they have received little or n o benefits from the valuable natural resources that they have allowed foreign companies to exploit. Clearly, the more a government relies o n proceeds from equity ownership rather than taxes and royalties, the greater i t s dependency o n good financial outcomes o f the mine. Analyses o f the developmental impacts o f E1projects by MIGA underwriters, in general, have made no attempt to assess the use o f E1revenues by governments, focusing mainly o n the private investment project itself. (The Overview report o f this joint OED/OEG/OEU evaluation addresses the issue o f the use o f E1revenues by governments for the World Bank Group.) Economic Sustainability: Financial Performance Limits Economic Benefits 59. Overall, economic sustainability was marginally better than financial sustainability for these projects, w i t h two projects rated moderately satisfactory, three others moderately unsatisfactory, and two unsatisfactory for economic sustainability. 60. Economic sustainability o f these projects also largely depended o n the price o f the mineral resource, moving inparallel with financial sustainability and profitability. This i s because the profitability o f the project influences not only the amount o f resources the project has available for supporting local community initiatives, but, more important, i t i s a major determinant o f the mine life. The volume o f economically mineable resources (and therefore the number o f years that the mine will operate and provide jobs and other benefits to the country/community) i s highly dependent o n the price o f these resources. 61. The most important benefits o f these projects to their host countries were in the areas o f employment creation in often remote and depressed areas, training, and government revenues. The seven projects created o n average 710 jobs, with a range o f 034to 1,375. Except for two projects, local 33. Internal MIGA staff workshops undertaken in 2003 have identified similar shortcomings o f the RMC process and other MIGA decision-making committees. 34. For a recently closed down project, OEU assumed a net job creation o f zero. - EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT MIGA’S EXPERIENCE Operations Evaluation Unit 20 employment at the time o f evaluation was higher than initially anticipated. One o f the exceptions i s an operation that was put o n care and maintenance due to i t s unprofitability under current metal prices. All evaluated projects allocated resources to training (an average o f US$1,200 per employee per year). Although aggregated annual govemment revenues f e l l short o f initial expectations by more than 50 percent, the contributions to local and central government budgets were s t i l l significant (averaging between US$5 and US$10 m i l l i o n per year) for most projects. Within the scope o f this evaluation, OEU did not assess the effectiveness o f the use o f E1 revenues by the host country governments (nor was there a baseline analysis o f these issues in MIGA underwriting documents), as it i s beyond the reach o f private sector projects that MIGA guarantees. All evaluated projects have supported local government financing and local initiatives to varying degrees. In more general terms, projects with a nearby labor p o o l and communities were more successful in generating direct economic benefits for those communities. There i s evidence that projects that allocated more funds to local authorities and affected populations were more favorably viewed and had fewer social problems than those where most o f the funds went to central government activities. Private Sector Development: Supporting Countries’ PSD Agendas 62. The majority o f the evaluated projects made positive contributions to private sector development in their host countries. Five projects were rated moderately satisfactory, and two moderately unsatisfactory. 63. All o f the projects were consistent with and supported the private sector strategies o f their host countries. M o s t projects under review were in countries where private investors had been hesitant to make large investments, either because there had been o n l y limited experience working with new governments, or because investors’ experience in previous projects with earlier governments had led to significant difficulties. In another case (see B o x 2), the project was the first and largest mining development in the country, following a comprehensive sector reform, with an important demonstration effect for other projects. Each investment was expected to generate a substantial increase in private investment in the country’s mining sector. 64. Government relations with project entities remained good in all the projects reviewed, and the experience o f the projects would, other things being equal, have supported h r t h e r investment in the sector. However, this expectation has not been fulfilled, probably because o f the fall o f metals prices through most o f the late 1990s, and the more recent global slowdown, which curbed investor interest in this complex sector. However, there was evidence that some mining investments guaranteed by MIGA in a particular country were viewed as pioneer investments, thereby changing foreign investors’ perceptions about i t s investment climate and leading to increased foreign investments in other sectors in the country. 65. In addition to demonstration effects and follow-up investments in some cases, the projects all enhanced private ownership in the host countries and contributed, to varying degrees, to the development o f downstream linkages. Some projects had local business development programs inplace to increase the amount o f local purchases as significant backward linkages were rarely automatic, and specific programs appeared to be needed to maximize such linkages. In addition, evaluated projects supported some infrastructure improvements, some o f which benefiting adjacent communities and regions. EXTRACTIVE INDUSTRIESAND SUSTAINABLE DEVELOPMENT- MIGA’s EXPERIENCE Operations Evaluation Unit 21 Box 2: Demonstratingthe Viability of Mining This project, underwritten in the second h a l f o f the 1990s, i s the largest miningproject in the host country involving m i n i n g and copper/gold ore processing at the mine site to recover copper and gold in concentrate, as w e l l as gold dore. I t was the first mining project following a major change in government policy designed t o encourage development o f a mining industry and t o diversify the economy and exports. MIGA provided coverage against losses due to transfer restriction, expropriation, and war and c i v i l disturbance for a minority equity investor and a shareholder loan. The MIGA coverage was part o f a m u c h larger political risk insurance package provided by national insurance agencies, covering commercial risks. MIGA’s political r i s k insurance coverage supported a loan package o n highly favorable terms, w h i c h encouraged the equity investors t o make a large investments in a new mining country. MIGA’s role in facilitating this investment was thus rated satisfactory. The project’s objectives were consistent with the W o r l d Bank’s strategy and support for miningsector reform, which helped set up a legal and fiscal framework- considered best practice - t o encourage the development o f the mining industry.Development o f the sector, however, was hampered by the economic downturn and declining metals prices, leading to a drop in investment in the sector. However, the ability o f the project t o establish and operate a large-scale mine, albeit at relatively modest financial and economic returns, has given confidence t o other potential investors in the industry.This has encouraged additional exploration and investment in other miningprojects. Overall, the PSD impact o f the project was rated moderately satisfactory. The project’s financial rate o f r e t u m i s expected to be below the rate initially estimate by the investors. This difference i s due to (1) cost overruns in constructing the mine and processing facilities; (2) lower ore content; and (3) lower-than- expected metals prices. T h e estimate for the economic rate o f return was similarly revised downward, but i s somewhat higher than the financial rate o f return because o f taxes paid (although these were lower than anticipated), and i s enhanced by wage payments to previously unemployed workers and by the training provided. The project’s economic sustainability was rated moderately unsatisfactory. A number o f additional benefits arise from the mine: an electrical connection for a nearby city, m a h n g available electricity at lower prices; rehabilitation o f transport infrastructure linking the region with a port, which i s usable by others; and social expenditures for education and community programs. The m a i n environmental concerns were related t o the selection o f the right-of-way for support infrastructure, where it was necessary to avoid sensitive and important natural habitats, as w e l l as cultural heritage sites. The mining operations are w e l l designed for total capture and evaporation in the tailings reservoir o f process tailings water and a l l site run-off water. The tailings dam has been designed and i s being operatedinspected t o MIGA dam safety standards. The environmental performance o f this project was rated moderately satisfactory. Although the social impact o f the mine has been relatively benign, the expectations o f the local population in the area where the mine i s located for employment opportunities and backward linkages t o local businesses have remained unfulfilled. This reflects in part a failure o f national and regional governments to prepare the local population t o take advantage o f opportunities created by the development and operation o f the mine, and the failure o f the company to initiate a dialogue with adjacent communities and the government t o build stakeholder support and t o reach a consensus o n human and regional development the project could foster. EXTRACTIVE INDUSTRIESAND SUSTAINABLE DEVELOPMENT - MIGA’s EXPERIENCE Operations Evaluation Unit 22 4. MIGA’s R o l e in E1 Projects: Contribution, Effectiveness, and Staff Perceptions 66. One o f the objectives o f this evaluation was to assess MIGA’s role in E1projects. The safeguard review, update and validation o f previously evaluated projects, and case studies all looked at MIGA’s contribution and effectiveness. MIGA’s business i s distinct from that o f the Bank and IFC. “MIGA neither invests, grants nor lends money to investors, nor does it propose or design projects. Like any other form o f insurance, investors and lenders who want this coverage pay premium^."^' Clearly, as an agency offering in political risk insurance, a primary dimension o f MIGA’s contribution i s expected to be the facilitation o r enabling o f FDI in countries and sectors where perceptions o f political risk are high. However, as a member o f the WBG, MIGA’s potential to add value i s broader than that o f a traditional insurer and encompasses environmental, social, and developmental impacts o f the projects it insures. In reference to this role, MIGA has also noted that “in order for investments to provide development opportunities for local communities, the projects must be environmentally and socially sound. Therefore, in carrying out i t s mission, it i s MIGA’s policy that all the foreign investments that i t insures are carried out in an environmentally and socially responsible manner.”36 Against this background, defining the value MIGA adds, as a member o f the WBG, i s even more important. 67. With respect to the environmental and social dimensions o f E1projects, MIGA’s role has evolved over the period covered by this evaluation, with a clearly improving trend. M o r e recently, the concept o f MIGA’s role has been more appropriately articulated as i t s “value added” to the projects it guarantees. The findings o f this evaluation indicate that there are areas where MIGA has added substantial value for some projects, while for others, MIGA’s role has been more that o f a traditional insurer (Le., limited to providing political risk coverage). The latter i s more likely when guarantee holders are lenders or minority partners, and less so if majority owners or operators. MIGA’s Contribution and Effectiveness 68. This sub-section draws o n findings from the evaluated projects to assess to what extent and in which ways MIGA had contributed to their improvement or success. These findings show that MIGA’s role and the degree and nature o f i t s contributions varied widely, as the agency changed i t s approach over the period covered by this evaluation. Where Was MIGA’s Value Added Lowest? 69. Business performance ofprojects. As expected from its Operational Regulations and role as an insurer, this review has found that MIGA plays no direct role in the financial performance o f E1projects, although the agency provides a potential safety net against the impact o f political risks. (While a reduction in political risks m a y have the potential to lower the cost o f capital and enhance financial performance indirectly, an analysis o f this relationship was not carried out in the scope o f this evaluation.) As an insurer w i t h the primary mandate to facilitate investment, MIGA does not participate in the operational or financial management o f the project and thus, i t s room for action i s very limited. Nevertheless, the financial viability o f i t s guarantee projects i s highly relevant for MIGA’s long-term financial sustainability, since poor financial performance can lead to early cancellation o f guarantees. 35. From Framework for Safeguard Policies at MIGA. MIGA’s external website: www.miga.org. 36. Op. cit. EXTRACTIVE - MIGA’S EXPERIENCE INDUSTRIES AND SUSTAINABLE DEVELOPMENT Operations Evaluation Unit 23 70. Project development impact/outcome. The development impacts o f evaluated projects, as presented in previous sections, have varied. Once a guarantee i s issued, MIGA does not normally influence the development impact o f the project and has not done so in any o f the projects reviewed. (In one project, MIGA had a positive role in community and environmental issues, see B o x 1.) Moreover, no follow-up development information about the reviewed projects existed in MIGA’s files, except if i t had an ex-post evaluation (Le., the six validatedprojects). The k e y role i s therefore for MIGA to select projects withhigh potential development impact through the underwritingprocess. Where Was MIGA ’s Value Added Highest? 71. Facilitating foreign investments. The provision o f political risk insurance i s a core tool for MIGA to facilitate FDIand the basis for the agency’s most important value added. Evaluated E1investments were primarily in countries in which private foreign investors had been reluctant to make large investments because o f either limited experience with new governments or difficulties faced by previous investments in that country or sector. In these cases, MIGA’s political risk insurance was important for enabling investment flows into the mining and o i l & gas sectors, and in some cases have led the way for other investments in the host countries. MIGA has acted as a facilitator o f investments, often with other partners, that otherwise would have been delayed or avoided. MIGA insurance was essential for most projects evaluated, given their location in countries with high political risks and l o w governance scores, and large sunk costs associated with investments in E1projects. I n some cases, investments would not have gone forward without MIGA’s involvement. 72. Environmental and Social Safeguards. Apart from reducing political risk for investors, the other area where MIGA has added value was in the incorporation, and/or enforcement o f safeguards in E1 projects and the advice MIGA experts (or those performing this function on MIGA’s behalf) have provided to clients. All E1projects reviewed have to some degree benefited from the incorporation o f environmental and social safeguards, even though not all o f the projects have attained a level o f full consistency w i t h MIGA safeguard policies. The association with the World Bank Group has been perceived by most investors both as an “umbrella” for their projects and as a source o f knowledge and best practice o n environmental and social aspects. In some cases, international investors have applied their o w n high standards consistent w i t h international best practice. 73. Inone case (a high-profile project with environmental and social ramifications), because the sponsor requested MIGA to provide coverage that would address landrights disputes, MIGA (with advice fi-om F C ) followed the land negotiations process in great detail, and obliged the sponsor to provide detailed information o n both the consultation process and the results o f the land usage agreement. MIGA then verified the validity o f the process and results with government and c i v i l society organizations at national, regional, and local levels. In another case, MIGA’s value added came during project implementation rather than at the design stage (see B o x 1). 74. In some projects, MIGA delegated environmental and social safeguards aspects to i t s partners, who took the responsibility for due diligence. These arrangements worked reasonably well (and were cost- effective) for MIGA when the partner adhered to similar environmental and social policies and guidelines (e.g., IFC). However, when a partner carrying out due diligence o n MIGA’s behalfhad lower standards than MIGA, it led to unsatisfactory results. This was the case in one project reviewed, where MIGA’s re- insurance agreement pre-dated the new MIGA practice by which the re-insured project must adhere to MIGA’s environmental standards. EXTRACTIVE INDUSTRIESAND SUSTAINABLE Operations Evaluation Unit - DEVELOPMENTMIGA’s EXPERIENCE 24 75. The results from several projects also demonstrate that well-designed plans for minimizing social impacts can greatly reduce social conflicts, thereby reducing the occurrence o f some o f the risks MIGA guarantees. Thus, there i s a strong business case for MIGA to add value by remaining engaged and providing more proactive social and environmental advice i t s clients involved in extractive industries projects. Staff Perceptions 76. WBG E I staff survey results: Divergence o f OE Ufindings from MIGA staffperceptions. The WBG E1survey was administered to relevant Bank, IFC, and MIGA staff. In MIGA, all current MIGA staff who have been directly involved with E1projects (either as underwriters or project managers) were asked to respond to the survey (the same set o f questions was given to World Bank and IFC staff involved in E1 sector pr~jects).~’ MIGA responses to the survey (Box 3) show some important differences from OEU evaluation findings o f E1projects. One notable divergence i s inthe area o f addressing environmental and social aspects o f E1projects: all (9 out o f 9) MIGA staff who responded felt that the issue ofmitigating environmental and social impacts was highly important and, at the same time, all (9 out o f 9 who responded) also felt that these issues had been adequately addressed in MIGA-guaranteed E1 projects. However, OEU’s safeguards review indicated that about 27 percent o f E1projects had substantial gaps and were not fully consistent with environmental and social safeguard~.~’ One possible explanation for this divergence i s the relatively short tenure o f the respondents in MIGA. This could have influenced their views in focusing o n the current, rather than historical, perspective. However, seven out o f 10 MIGA respondents were also directly involved in five projects covered in this review, increasing the relevance o f their answers. 77. The joint WBG evaluation (as reflected in the Overview Report) identified the lack o f adequate coordination among the three WBG organizations as a problem that constrains the delivery o f better results in E1projects. However, all (8 out o f 8) MIGA respondents indicated that, in their view, the level o f coordination was adequate, which m a y suggest a desire to preserve MIGA’s operational “autonomy” (Le., not getting too involved with WBG operations/processes). These results are also likely to be a reflection o f the differences in products, clientele, and procedures between the Bank and MIGA, where staff see opportunities for coordination as inherently limited to policy and strategy matters. Similarly, very few (2 out o f 7) MIGA staff felt that there was a need for better support from W o r l d Bank country units, in contrast to IFC’s staff perceptions. 37. It should be noted that given the size o f the Agency, the survey was administered to the entire population o f current MIGA underwriters and project managers involved in E1projects. Thus, it was sent to 12 MIGA active staff, with a response rate o f 83 percent (10 stafq. 38. The C A O report Insuring Responsible Investments? A Review o f the Application of MIGA’s Environmental and Social Review Procedures (CA003107/2003, accessible at wwwxao-ombudsmanorg) also deals with the treatment o f environmental issues, but addresses procedural compliance rather than the more in-depth examination o f compliance with individual safeguard policies, which OEU considered. Thus, it i s not directly comparable with this staff survey which specifically asked about the treatment and application o f environmental issues in E1projects. EXTRACTIVE INDUSTRIESAND SUSTAINABLE - MIGA’s EXPERIENCE DEVELOPMENT Operations Evaluation Unit 25 Box 3. Main Messages from Responses by M I G A Staff in WBG E1 Survey The survey was administered to a l l MIGA staff (12) previously involved in E1projects, with a response rate o f 83 percent (10 out of 12). W h i l e the absolute numbers are small (as MIGA itself i s small, with a total o f 78 Intemational staff) it represents the statistical population of MIGA staff w h o have worked o n the E1sector projects. Inparallel, the same survey was sent t o 5 1World Bank staff, with 26 responding (5 1percent o f E1staff) and at I F C to 33 staff, with 30 responding (91 percent). (Since not a l l respondents provided answers to a l l questions, the total number o f respondents t o specific questions are noted below.) Importance o f EI-related issuesfor EI-dependent countries: Almost a l l MIGA and WBG respondents agreed with the importance o f a l l E1 issues the survey questionnaire had identified. In particular, all (9 out o f 9 ) MIGA respondents agreed with the importance o f mitigating negative environmental and social impacts. On the other hand, the investment climate, and govemance and transparency, were considered highly important by only one-third (3 out o f 9 ) o f MIGA respondents, whereas a higher share (two-thirds) o f IFC and W o r l d Bank respondents felt these were highly important in E1projects. Extent to which EIprojects address EI-related issues: The majority o f MIGA respondents and about two-thirds or more o f a l l WBG respondents, felt that WBG projects collectively and adequately addressed all major issues, except the improvement o f transparency and govemance. Moreover, all (9 out o f 9) MIGA respondents felt that the mitigation o f negative environmental impacts (same proportion for IFC) and revenue generation had been adequately addressed in past E1projects. Coordination across WBGfor the Elsector: All (8 o f 8) MIGA respondents considered the coordination across the WBG as adequate, while only 48 percent o f IFC respondents and 52 percent o f W o r l d B a n k respondents considered the level o f coordination as sufficient. Avoidance o f EIprojects due to safeguards concerns: A m o n g the possible sources o f avoidance o f potential E1 projects due t o safeguard concerns, MIGA respondents identified WBG management (6 out o f 6) and E1public agenciedenterprises (3 out o f 4) as the top t w o leading causes. W h i l e a l l WBG respondents also cited WBG management as a primary cause, only 21 percent o f W o r l d B a n k respondents and 56 percent o f IFC respondents considered E1public agencies/enterprises an important factor. Factors constraining the ability o f WBG staff to assist client countries in E I sector: M o r e than h a l f o f MIGA respondents (5 out o f 9 ) cited the inadequate linkage between E1sector activities and sustainable development as the major factor constraining their ability to assist host countries in the E1 sector. Additionally, less than a third of MIGA respondents cited inadequate availability o f staff with appropriate skills; inadequate level o f support from the Bank’s Country DepartmentKountry Management Unit; and inadequate level o f support from the client govemment. 78. MIGA respondents (6 out o f 6) also felt that WBG (World Bank, IFC and MIGA) management i s the most likely cause for avoiding good E1projects due to perceived risks and the time needed to address safeguard concerns. These responses indicate that staff find WBG management i s overly cautious and also some (4) believe that public agencies interfere with, rather than facilitate, MIGA’s work. On the other hand, none o f the respondents felt that concerns f r o m host countries about safeguards were a source for avoiding good E1projects. EXTRACTIVE INDUSTRIESAND SUSTAINABLE DEVELOPMENT - MIGA’s EXPERIENCE Operations Evaluation Unit 26 5. Findings and Recommendations 79. MIGA ’s activities inthe extractive industry sectors have evolved significantly in the period under review (inparticular since 1997) improving i t s operations at approval and during implementation, learning f i o m i t s experience in underwriting3 1projects. Noteworthy milestones are i t s Business Process Review, the creation o f an in-house environmental unit, the environmental assessment and disclosure polices, the approval o f interim issue-specific safeguard policies, and the updating o f i t s guarantee contract language, and reinsurance practice. 80. MIGA’s approach over the years has followed the guidance o f i t s Convention, Article 2 o f which states that “the objective o f the Agency shall be to encourage the flow o f investments for productive purposes.” Article 12 requires the Agency to satisfy itself as to “the economic soundness ofthe investment and i t s contribution to the development o f the host country” and to the “consistency o f the investment with the declared development objectives and priorities o f the host country.” These objectives also underpin MIGA’s need to use environmental and social standards for the projects i t insures. As standards for successful development have become more complex and sophisticated, MIGA has adapted i t s safeguard policies and its analyses o f the development impact o f projects. MIGA continues to refine and augment the scope o f i t s selection criteria. The findings and recommendations listed in this section are intended to contribute to this process. Findings Portfolio 81, Extractiveindustry projects and guarantees constitute a declining share of MIGA’s portfolio. Mining was originally the largest share o f MIGA’s guarantees comprising over h a l f o f i t s portfolio. Extractive industriesn o w constitute about 11percent (6.6 percent mining and 4.3 percent o i l and gas), and MIGA continues to be actively engaged in the sector. Application of environmental and social safeguards 82. Consistency of project performance with safeguards has generally been greater during implementationthan at approval, and the trend in safeguard performancehas been improvingover time. On average, the rate o f substantial consistency with MIGA’s safeguard policies o f E1 projects improved f i o m 73 percent (at Board approval) to 88 percent (during implementation or at guarantee cancellation). This likely reflects the expansion o f MIGA’s efforts and o f i t s capacity in safeguard areas since 1997. 0 At Board approval, the greatest areas of weakness in safeguard performancehave been in consultation and disclosure, inadequate incorporation o f safeguard issues in contracts o f guarantee, and in specific elements, including resettlement, indigenous peoples, natural habitats, dam safety, and lack o f clarity o n mine closure provisions. 0 During implementation, the greatest areas of weakness in safeguard performance have been in consultation and disclosure, final assessment o f resettlement implementation, and natural habitats. Reporting o n social impacts and social safeguard compliance has also been weak. EXTRACTIVE INDUSTRIES - DEVELOPMENTMIGA’s EXPERIENCE AND SUSTAINABLE Operations Evaluation Unit 27 83. Insufficient attention paid to consistency with social safeguards i s the most sensitive and critical issue in extractive industries projects. Only one-third o f the sampled projects that involved indigenous peoples and resettlement and community development issues, had prepared a comprehensive and implementable Resettlement Plan (RP), or Community Development Program (CDP). N o t a single reviewed project (where these safeguards were applicable) had a comprehensive and implementable Indigenous Peoples Plan (IPP) at Board approval. 84. None of the contracts issued for the projects under review specified the safeguard policies that applied, and only a few indicated the WBG’s environmental,health, and safety guidelines that applied. Although all recent MIGA contracts allow MIGA to terminate the contract i f t h e project does not comply with MIGA’s environmental polices and guidelines and there has been a more consistent effort to reference to this requirement since 1999, this may not be sufficient to ensure investors’ awareness o f specific applicable policies and guidelines. 85. MIGA has not consistently required environmental and social monitoring reports from its guarantee holders in its contract of guarantee. In two-thirds o f the reviewed projects, senior lenders, bilateral agencies, or the major investors provided regular monitoring reports o n environmental (and sometimes social) issues that allowed MIGA to monitor safeguard compliance. However, in four projects there were no follow-up monitoring reports from investors, leaving MIGA in a vulnerable position regarding safeguards implementation. 86. Committed investors with the capacity to implement mitigation and monitoring programs have been an important factor in ensuring better safeguard compliance. Internal Capacity 87. Environmental performancewas treated more thoroughly by MIGA in the second half of the 1990s than in the first half, especially since the creation o f an environmental unit. MIGA relied o n environmental/social experts o f I F C or o f other parties in the project before the establishment o f its o w n unit. Insix o f 12 projects reviewed, independent monitoring and reporting initiatives were taken by either senior lenders or other insurers, and not by MIGA. I n some earlier projects, there was no explicit contractual obligation and no recourse to MIGA for the project to comply with safeguard policies. MIGA environmental specialists visited five o f the 12 projects reviewed, following the establishment o f the in- house environmental unit. MIGA could have had greater impact o n improving project performance had i t taken a more proactive approach earlier in i t s history. 88. MIGA’s due diligence model (and current capacity) i s not sufficient to adequately address social aspects of extractive industriesprojects. The current MIGA approach o f gearing the processes o f monitoring and supervision, directing i t s resources and staff selectively to projects after problems emerge, i s not appropriate to deal with complex social issues often associated with E1sector projects. Systematic and proactive monitoring, including site visits by MIGA experts, to i d e n t i f j the nature o f possible gaps in safeguards and potential problems i s a critical element o f the due diligence process. They are particularly important to assess the social risks at critical project cycle milestones, which can not be adequately done through desk reviews. EXTRACTIVE INDUSTRIESAND SUSTAINABLE - MIGA’s EXPERIENCE DEVELOPMENT Operations Evaluation Unit 28 89. MIGA’s delayed involvement in extractive industries projects has meant missed opportunities to add value or to improve projects’ environmentaland social performance. One consequence i s that projects’ environmental and social management systems are not inplace at the start ofproject construction; this can lead to adverse social and environmental impacts due to the lack o f control over the w o r k o f contractors. This i s the most critical period for investors in their relationship with project-affected communities, and any good will that has been generated during their previous dealings (andpromises) with the community can quickly sour, leaving investors with a difficult legacy to overcome when the project becomes operational. Development Impacts and Underwriting 90. The evaluated extractive industries sector projects generally have produced positive economic impacts in host countries, but investor returns have been disappointing. Actual financial returns to investors were lower than originally anticipated, due to decreasing metals prices in the late 1990s as well as cost overruns and lower ore quality than expected. The projects providedjobs, training, revenues to the government, and funds to community initiatives, and had demonstration effects for private sector development. Host governments have received less revenue than they expected because o f the poorer- than-expected economic and financial performance o f extractive industry projects. 9 1. MIGA’s underwritingfor extractive industries projects reviewedwas generally thorough and project assessments were based on the information available from the clients at that time, although their components could have been better integrated. Analysis was compartmentalized by the sources o f the information (e.g., investors, MIGA underwriters, and environmental specialists). While most elements are combined when projects are assessed, economic and social analyses and impacts have not been w e l l integrated. E1 projects reviewed were complex, involved large investments and revenues for the host governments, and had important environmental and social implications; subjecting them to close public and international scrutiny. Thus, they requireda more holistic understanding o f financial, economic, social and environmental aspects from a developmental perspective. 92. Security-related incidents in MIGA guaranteed extractive industries projects involving allegations of violations of individual rights can pose particularly high risks for MIGA. Some reviewed MIGA projects experienced incidents where alleged violations o f rights o f individuals occurred in connection with site security. Such violations can increase risks to MIGA-guaranteed projects (increasing conflict and affecting operations) and to MIGA i t s e l f (reputational risk as w e l l as claims brought under c i v i l war and disturbance, and expropriation coverages). Even though issues related to human rights are part o f MIGA’s due diligence process when they have an impact o n covered risks, greater awareness during underwriting by MIGA staff and ensuring that they are adequately dealt with by investors w o u l d better address such risks. 93. Lack o f a systematic and post-contract follow-up of developmental impacts in extractive industry projects. MIGA does not have a system that monitors developmental impacts to identify shortcomings after contract signing and to manage risks f r o m the developmental perspective. EXTRACTIVE INDUSTRIESAND SUSTAINABLE Operations Evaluation Unit -MIGA’s EXPERIENCE DEVELOPMENT 29 MIGA ’s role in extractive industries projects 94. Most of the evaluated projects were in difficult countries with weak governance as well as high perceived political risks, where MIGA’s political risk insurance was deemed essential for investments to go forward. Thus, MIGA provided value added as an insurer, by facilitating and enabling foreign direct investment in these large and complex projects. 95. Surveyed MIGA staff who have been involved in underwriting extractive industry projects are supportive of MIGA’s environmental and social standards and feel that MIGA i s doing a sound job in applying these standards to i t s projects. These staff see n o need for increased coordination with the Bank and IFC o n extractive industries projects. 96. I n some projects, MIGA delegated environmental and social safeguard due diligence to i t s partners. These arrangements worked well when the partners adhered to similar policies and guidelines. But if a partner had lower standards than MIGA (such as in an older reinsured project), it led to unsatisfactory results and left MIGA vulnerable. 97. MIGA’s particular value added as an insurer of extractive industries projects i s in the environmental and social standards it brings with i t s guarantees. This aspect o f i t s insurance i s appealing to many investors as i t helps them manage their o w n non-financial project risks. Hands-on assistance/advice i s possible and desirable in extractive industries projects, and it i s appreciated by clients. 98. There i s a strong business case for M I G A to add value by providing substantive and continued social and environmental advice to extractive industries clients after contract signing. The results fkom several projects demonstrate that well-designed plans for minimizing social impacts can greatly reduce social conflicts, thereby mitigating the political risks MIGA guarantees whereas their absence can lead to serious problems. EXTRACTIVE - INDUSTRIES AND SUSTAINABLE DEVELOPMENT MIGA’S EXPERIENCE Operations Evaluation Unit 30 Recommendations MIGA’s support to E1sector projects has the potential to generate positive development results. MIGA should continue underwriting E1 projects while strengthening i t s value added to meet stakeholders’ expectations. MIGA’s safeguard policies provide the basis, and an opportunity, for contributing to the development effectiveness o f E1projects it guarantees. Recommendation I:Strategy and Rules of Engagement MIGA needs to recognize and promote the potential benefits it brings to E I projects through its internationally recognized and comprehensive set of safeguard policies and its environmental and social impact mitigation services. MIGA ’s engagement with EIprojects should move beyond compliance with its environmental and social safeguard policies toward the promotion and achievement o f the development effectiveness of these projects. This requires: 1.1 Recognizing that MIGA has the opportunity to add value to E1projects by adopting an explicit business strategy focused o n providing proactive environmental and social advice to i t s guarantee clients that brings E1 projects closer to best practices in the industry, w i t h the goal o f achieving sustainable development. This requires strengthening the economic and social components in MIGA’s work in addition to the environmental component. This calls for a more proactive, forward-looking approach to servicing clients that goes beyond the current practice o f intervening only when events warrant it. 1.2 Strengthening the upstream involvement of environmental and social issues in MIGA’s underwriting decision-making process. This entails consistently identifying applicable safeguard policies to clients as early as possible in the underwriting process, and using r i s k assessments early o n to identify where failures in the safeguard system may occur to avoid adverse impacts o n the environment and local communities. MIGA needs to make a greater effort to work w i t h clients to ensure compliance with i t s environmental and social safeguard policies and guidelines at the time o f Board approval. In addition, MIGA needs to consider h o w i t s work in assessing, underwriting, and supervising i t s guarantee projects can go beyond the monitoring o f compliance with safeguards toward promoting development effectiveness in i t s projects. 1.3 Associating with investors committed to sustainable development and avoiding those who are unable to provide MIGA with timely environmental and social monitoring reports during implementation. MIGA should satisfy itself before engaging in new E1 projects that the investor understands i t s environmental and social responsibilities and demonstrates ownership at the top management level to community development and mitigating environmental and social impacts. The project enterprise’s organizational structure, policies, and stated mission should be consistent with these goals. EXTRACTIVE INDUSTRIESAND SUSTAINABLE - MIGA’s EXPERIENCE DEVELOPMENT Operations Evaluation Unit 31 Recommendation 2: Policies, Procedures, and Enforcement Mechanisms MIGA should strengthen its internal policies and support them by appropriate procedures and guidelines to staff to ensure accountability. This requires: 2.1 Establishing intemal requirements for MIGA’s timely engagement and systematic monitoring to maximize environmental and social benefits. This will entail avoiding projects where MIGA can not address environmental or social issues to improve the outcome due to i t s late participation. Site visits by MIGA’s environmental and social experts should be required as early as possible in i t s involvement in category A and other high-risk projects to assess which policies are applicable. MIGA should not rely exclusively o n assessments and reports o f non-WBG institutions. 2.2 Incorporating standards recognizing the rights o f individuals relating to security arrangements at E1 projects into i t s policies and operational regulations. 2.3 Making better use o f M I G A ’ s Contracts o f Guarantee to enable the Agency to facilitate compliance with i t s policies and standards. In addition to the current requirement to comply with safeguard policies and environmental and health and safety guidelines, for future projects MIGA should ensure that the contracts clearly and explicitly state which environmental and social safeguard policies and guidelines apply to the project under guarantee and establish thresholds and conditions for timely and effective compliance. When applicable, contracts should also specify requirements for implementation o f Environmental Management Plans, Resettlement Plans (RP), Community Development Programs (CDP), and Indigenous Peoples Plans (IPP). As required by the involuntary resettlement and indigenous peoples policies, MIGA should ensure that investors prepare RPs, CDPs, and IPPs before project approval rather than leaving them to implementation. 2.4 Establishing necessary mechanisms to ensure systematic, timely, and regular monitoring and supervision o f safeguard compliance o f MIGA E1 guarantee projects (e.g., MIGA should require in i t s Contracts o f Guarantee timely environmental and social monitoring reports from i t s guarantee holders during the project implementation phase). MIGA should also require sponsors to set up environmental and social project management systems at a sufficiently early stage to effectively monitor impacts, including during the construction stage. Recommendation 3: Internal Organization MIGA should update its business model by clearly assigning the locus o f responsibility for better integration of economic, environmental, and social issues in MIGA operations. This is needed in order to support other departments in the achievement of these objectives and to provide guidance to operational stafl as well as for the analysis and monitoring o f economic, environmental, and social issues in an integrated manner. This requires: 3.1 Scaling up the analysis o f developmental impacts o f prospective projects, integrating new concepts inharmony with the rest o f the W o r l d Bank Group. In so doing, MIGA should closely cooperate with the other members o f the WBG to benefit from synergies, complementarities, and expert knowledge, with the objective ofpromoting a holistic approach to E1projects. This will also require building intemal capacity by both recruiting needed economic skills and appropriate training to current staff. 3.2 Establishing an intemal system that allows a more integrated and timely monitoring o f developmental impacts o f guaranteed projects. EXTRACTIVE INDUSTRIESAND SUSTAINABLE Operations Evaluation Unit - MIGA’s EXPERIENCE DEVELOPMENT 32 3.3 Upgrading and expanding the role o f environmental and social specialists and, at the same time, building internal social skills capacity to effectively enable the application o f social safeguards in MIGA projects. 3.4 Formalizing the practice o f ensuring that MIGA environmental staff are involved in projects beyond the submission of clearance memos, and requiring that MIGA environmental and social staff to provide inputs to guarantee and legal documentation to incorporate any environmental and social concerns. In addition, MIGA underwriting staff should be required to keep environmental and social specialists appraised o f all relevant changes beyond Board approval and contract signing. Recommendation 4: Legacy of Active E I Projects MIGA needs to review its portfolio o f active EIprojects to identijjpotential or actual deficiencies in the application of safeguard policies &to swiftly take appropriate remedial actions. This should involve: 4.1 Identifying projects that may not be consistent with safeguard policies. In particular, where resettlement and land acquisition has taken place without follow-up audits to determine compliance with WBG policies regarding resettlement, third-party audits should be required. Similarly, where indigenous peoples have been affected without the provision for Indigenous Peoples Plans to mitigate the impacts, sponsors should be asked to prepare and implement such plans. Providing briefings on potential problems with sensitive projects, a system currently used by MIGA, i s useful but not sufficient. MIGA should take appropriate remedial actions to address existing safeguard deficiencies in extractive industryproj ects that are s t i l l active in MIGA’s portfolio. 4.2 Making every effort to encourage consistency with MIGA’s safeguard policies in active extractive industries projects with reinsurance agreements pre-dating the new MIGA practice. New agreements require that environmental and social standards applied by partners are consistent with MIGA’s o w n safeguard policies and guidelines. ___________ EXTRACTIVE - MIGA’S EXPERIENCE INDUSTRIESAND SUSTAINABLE DEVELOPMENT Operations Evaluation Unit 33 ANNEXES EXTRACTIVE INDUSTRIESAND SUSTAINABLE - MIGA’s EXPERIENCE DEVELOPMENT Operations Evaluation Unit CONFIDENTIAL DRAFT 34 Table o f Annexes Annex 1: M I G A Guarantee Projects in the Extractive Industries, FY1990-2003 Annex 2: MIGA Extractive Industries Projects Evaluated b y OEU Annex 3a: MIGA Safeguard Policies - Criteria for Consistency at Approval Annex 3b: MIGA Safeguard Policies - Criteria for Projects Under Guarantee Annex 4: MIGA Safeguard Policy Triggers Annex 5a: Safeguard Policy Consistency Ratings o f MIGA E1Projects at Approval Annex 5b: Safeguard Policy Consistency Ratings of MIGA E1Projects Under Guarantee 0 t- 0 oo 0- " " 0 3 0 00 8 3 3 M W + 0 0 qQ R E 8 m 0 0 c1 h 3 m " no\ * I n & .2 L c, 2 a el H a, a, c, el E m 5 s E *. 3 w B 4 0 0 0 0 0 0 8 0 8 0 8 0 2 N 8 3 F N vr m a - B 3 V e, B u 0 0 0 0 8 0 8 0 2 3 2 a d a w a W m m m m s\ 8 v) 4 6 W 0 m 2 v M u I 0 0 8 z- 0 m m t o c o c 9 IC 0 ' " l- t Q Y) I I f & u d A m B g m 8 B 3 E a > J n 4 p: n a F z W P Y Z 8 Q\ 3 M * Q, .I c, V E a c, 4 E E 0 0 c c " .. N n Q) a 4 41 Annex 3a: MIGA Safeguard Policies - Criteria for Consistency at Approval Criterion Reauirements Comprehensive Environmental Applies to both majority and minority owners and lenders (designated herein as “sponsors”) - required for a l l ‘As’ and for ‘Bs’ if host Assessment country legislation requires: (i) Comprehensively includes natural environment, social aspects, human health and safety, major hazards, transboundaryiglobal and cumulativeiinduced impacts; ( ii) prevent, minimize, mitigate or compensate for adverse environmental and social impacts and enhance positive impacts; ( i ii) potential for independent environmental advisory panel in case o f highly risky o r contentious project;(iv) properly defined area(s) o f project impact; (v) for expansion or modernization projects the entire plant i s subject to an EA (usually including an environmental audit) ; (vi) privatization projects require environmental audits; (vii) EAs (including environmental audits) to be carried out or reviewed by independent consultants; and (viii) compliance with more stringent o f host country or MIGA environmental and health and safety standards or guidelines Adequate analysis o f feasible Proper analysis o f project alternatives including: (i) without project alternatives alternative; (ii) where appropriate other sector alternatives; (iii) alternative sitings for facilities and routings o f infrastructure corridors; (iv) alternative technologies and mitigation arrangements; and (v) analysis o f feasible alternatives Comprehensive E&S baseline Full description (with adequate support data) o f the climatic, geological, topographical, physical, chemical, biological and socio- survey cultural-economic environment o f the area o f project impact as a basis for an adequate analysis o f project impacts and fbture monitoring o f the efficacy o f the mitigation measures incorporated into the project Adequate EAP or E M P A detailed plan o f the set o f mitigation, monitoring and reporting measures proposed to be taken during project implementation to proposed eliminate adverse environmental o r social impacts, offset them, or reduce them t o acceptable levels - required for all ‘As’ and ‘Bs’. Project Sponsor’s EMS Comprehensiveness o f environmental, social and safety management system proposed by the sponsor (including contractors) to fully adequate implement the EAP or EMP, as w e l l as appropriateness o f proposed measures to strengthen these arrangements Public disclosure/consultation (i) consultation with local affected parties and local interest groups addressed during EA process; (ii) disclosure o f information in a timely manner and in a language and f o r m understandable and accessible to local groups; ( iiifor “A” projects final EA reports disclosed locally and ) through the W o r l d Bank Info-shop at least 60 days before MIGA Board approval. Comprehensive and (i) avoid or minimize involuntary physical resettlement or economic implementable RP/CDP displacement; ( ii)directly affected and displaced persons should be: (a) informed o f their options and rights regarding land acquisition and prepared resettlement as w e l l as alternatives that are available; (b) compensated for their losses at full replacement cost prior to the actual move; (c) assisted with the move and supported during the transition period in the resettlement site; and (d) assisted in their efforts t o improve their former living standards, income earning capacity, and production levels, or at least to restore them. Particular attention should be paid to the needs o f the poorest groups to be resettled; (iii) Land, housing, infrastructure, and other compensation should be provided to the adversely affected population, indigenous groups, ethnic minorities, and pastoralists w h o may have usufruct or customary rights to the land 42 Criterion Requirements or other resources taken for the project. The absence o f legal title to land by such groups should not be a bar to compensation; (iv) alternative or similar resources provided to compensate for the loss o f access to community resources; (v) in new resettlement sites or host communities improve, restore or maintain accessibility and levels o f service for the displaced persons and host communities (vi) minimize impacts o n host communities including consultation with these communities; (vii) consult and involve affected people in planning, and implementation; (viii) community level impacts require preparation o f community development programs to improve the economic and social well-being o f the affected communities as w e l l as the affected households; (ix) preparation o f a resettlement plan (RP), or other resettlement instrument (e.g., resettlement framework) as agreed with MIGA; and (x) disclosure o f RPs involving more than 50 households or 250 neonle. Comprehensive and Appropriate identification o f indigenous groups in project area, namely implementable P P prepared those having: (a) close attachment to ancestral territories and the natural resources in them; (b) self-identification and identification by others as members o f a distinct cultural group; (c) presence o f customary social and political institutions; (d) economic systems primarily orientated to subsistence production; and (e) and indigenous language. Ensure: (i) avoidance and mitigation o f adverse impacts; ( i i) informed participation o f the indigenous peoples themselves; ( iii) culturally appropriate compensatory measures o r social and economic benefits; and (iv) in consultation with indigenous peoples preparation o f an Indigenous Peoples Plan (IPP). Natural habitats protected or (i) Project does not significantly conveddegrade a critical habitat; ( ii) offsets provided natural habitats are correctly identified; (iii) alternative analysis examines alternatives to significant conversion; (iv) if conversion can not be avoided, impact are minimized, mitigated and offset requirements are examined. Comprehensive Dam Safety New Dams: measures proposed Safety measures from design t o operation for dam and associated works, including for: (i) dams >15 meters in final height; (ii) for special case (flood prone, seismic area, difficult foundations, toxic materials, etc) dams between 10 and 15 m; and ( iii) for dams initially under 10 m if expected to become large dams during construction, require the following: (a) reviews by independent expertise throughout design and construction o f dam and for start o f operations; (b) plan for construction, supervision and quality assurance, plan for instrumentation, an O&M plan, and an emergency preparedness plan; (c) construction by fully qualified companies under proper supervision; (d) periodic safety inspections after completion o f construction; Existing Dams: (i) independent dam specialist(s) to evaluate safety status, performance history and owner’s operatiodmaintenance procedures; and ( ii) specify remedial works o r safety-related measures t o upgrade d a m t o an acceptable standard o f safety. Tailings Dams and Ash Lagoons: (i) this policy applies to such dams in excess o f 10 m if: (a) the impoundment i s cross-valley structure; or (b) after construction o f a starter dam, the impoundment structure i s made o f whole tailings; or (c) standard testing methods indicate net acid generating potential o f tailings or ash. However generic safety measures designed by 43 Criterion Reauirements qualified engineers are adequate for such dams less than 10 m in height, if tailings or ash have n o net acid generating potential and impoundment i s : (a) located in relatively flat terrain, highly arid areas or in permafrost zones; and (b) not subject to inflow f r o m streams or rivers: (ii)stream diversions and spillways t o be designed for 100 yr flood; and ( i ii) preparation o f closure and abandonment plans. Cultural Property protection (i)avoid harm to significant, non-replicable cultural property or with proposed the help o f qualified experts mitigate such impacts if loss i s judged to be minor or otherwise acceptable; (ii) sponsor addresses protectiodmanagement o f cultural property in project area including “chance finds”; ( iii) sponsor meets host country regulationsAaws (or adheres to best practice in the absence o f host country laws); and (iv) sponsor consults with relevant stakeholders in documenting presence and significance o f physical cultural resources. The set o f requirements for each criterion o f safeguard policy compliance were rated according to the following scale: 0 High: the set o f requirements were fully met, or expected to be fully met, with n o shortcomings 0 Substantial: the set o f requirements generally were met, or expected to be met, with only minor shortcomings 0 Modest: the set o f requirements were met, or expected to be met, but with significant shortcomings 0 Negligible: the set o f requirements were not met, or expected not to be met, due to major shortcomings 44 Annex 3b: MIGA Safeguard Policies - Criteria for Projects under Guarantee Criterion Requirements E M or EMP fully Assess h o w effectively the E A P or E M P has been implemented by t h e sponsor implemented and note any gaps and deficiencies. Note h o w w e l l E A P or E M P implementation progress has been documented and reported in a timely manner. Note any deviations f r o m the original plan and if these were appropriate considering the circumstances. E&S monitoring Assess if the EAP’s o r EMP’s E&S monitoring plan has been implemented implemented according to the timing proposed. Assess if the monitoring results are substantiating the effectiveness o f the E&S mitigation measures or not. Note if the results are being used to take corrective measures if needed. Sponsor’s project Determine if the sponsor has implemented the environmental, social and safety implementation EMS management system proposed in the EAP or EMP. Assess the effectiveness o f the proposed institutional strengthening measures to improve this system and whether effective the system has active sponsor management support. Assess i t s sustainability in the longer term. Continuing public Determine the extent to which project affected groups and other stakeholders disclosure and continue to be consulted and involved during the implementation phase o f the project. Assess if there have been any complaints by project affected people and consultation h o w these complaints were dealt with by the Borrower. Full compensation o f Assess if displaced persons have been: (a) compensated for their losses at full PAPS replacement cost prior to the actual move; (b) assisted with the move and supported during the transition period in the resettlement site; and (c) assisted in their efforts to improve their former living standards, income eaming capacity, and production levels, or at least to restore them. R P K D P fully Determine if the RF’/CDP has been fully implemented by the sponsor. Assess if implemented the sponsor has adequately monitored and evaluated the activities set forth in the RF’ICDP. I f upon termination o f the contract o f guarantee the RPiCDP has not been fklly implemented assess what follow up actions the sponsor proposes to meet the objectives o f the plan and if these are adequate. IPP fully implemented Determine if the IPP has been fully implemented by the sponsor. Assess if the sponsor has adequately monitored and evaluated the activities set forth in the IPAP. If upon termination o f the contract o f guarantee the I P A P has not been fully implemented, assess what follow-up actions the sponsor proposes to meet the Dbjectives o f the plan and if these are adequate. Natural Habitats Assess if sponsor has taken a l l necessary measures t o limit any significantly protected or offsets :onversioddegradation o f critical natural habitat a n d o r provide offset requirements as proposed i n the EA. Assess the sustainability o f these measures provided m c e the project has been implemented. Dam Safety measures For new dams covered by the policy, assess if the safety measures recommended implemented )y the independent d a m expert( s) throughout investigation, design and :onstruction o f d a m and start-up o f operations were implemented. Evaluate :ffectiveness o f plans for construction, supervision and quality assurance, as w e l l IS for instrumentation, O&M and emergency preparedness. Assess the results o f )eriodic safety inspections after completion o f construction. F o r existing dams, 45 Criterion Requirements assess if the safety measures proposed by the independent dam specialist(s) have been implemented as proposed and note any deviations. Cultural Property Assess if appropriate measures were taken by the sponsor to avoid harm t o protected significant, non-replicable cultural property and provide protectiodmanagement o f cultural property in project area including “chance finds” according to best practice or host country regulationsilaws. Reporting on safeguard Determine if MIGA has specified a comprehensive set o f safeguard policy policies by sponsor performance indicators that are appropriate for the project under implementation. Assess the timeliness and effectiveness o f the reporting o f indicators and their adequate evaluation by the sponsor and MIGA, noting any deficiencies. Assess if the following requirements have been met: (i) MIGA ensures that contract o f guarantee includes an obligation to carry out the EAP/EMP and includes as additional conditions specific measures under the EAP/EMP, as appropriate for facilitating effective monitoring o n E M P implementation; and (ii) the sponsor’s obligations to carry out the W / C D P andior IPP (or other instrument agreed with MIGA) and to keep MIGA informed o f implementation progress are provided for in the contract o f guarantee. M&E o f safeguard MIGA reviews regular monitoring reports o n safeguard compliance provided by policies by MIGA the sponsor and notes any areas o f concern for follow up with sponsor. MIGA bases supervision o f the projects environmentallsocialsafety aspects o n the adequate findings and recommendations o f the EA, including measures set out in the legal agreements, any E M P and other project documents, and ensures that supervision missions contain adequate environmental and social expertise. During supervision MIGA reviews sponsor’s implementation progress (incl. progress reports) and assesses Borrower’s compliance with agreed environmental actions, particularly the implementation o f environmental and social mitigation, monitoring and management measures. If compliance i s unsatisfactory, MIGA discusses with sponsor actions necessary to correct non-compliance and follows up o n the implementation o f such actions. The set o f requirements for each criterion of safeguard policy compliance were rated according to the following scale: 0 High: the set of requirements were fully met, or expected to be fully met, with n o shortcomings 0 Substantial: the set of requirements generally were met, or expected to be met, with only minor shortcomings 0 Modest: the set o f requirements were met, or expected to be met, but with significant shortcomings 0 Negligible: the set o f requirements were not met, or expected not to be met, due to major shortcomings. 47 Annex 4: MIGA Safeguard Policy Triggers Safeguard Policy Trigger Environmental Assessment - Adverse environmental and social impacts that are sensitive, “A” category diverse or unprecedented and likely to be significant beyond the (May 1999) project fenceline Environmental Assessment - Projects whose impacts are limited in number, less adverse than “B” category those o f Category “A”, and can be addressed by compliance (May 1999) with MIGA’s environmental guidelines or through application of recognized pollution prevention and abatement measures (or recognized best management practices) Natural Habitats (Interim 2002 Significant conversion or degradation o f natural habitats, or loss policy) or modification o f habitat in protected areas Involuntary Resettlement Involuntary taking o f land resulting in (i) relocation or loss o f (Interim 2002 policy) shelter; (ii)loss o f assets or access to assets; or (iii) loss o f income source or means o f livelihood Indigenous Peoples (Interim Conflicts with or adverse impacts on indigenous peoples, tribes 2002 policy) or ethnic minorities whose social and economic state restricts their capacity to assert their interests and rights in land and other productive resources D a m Safety (Interim 2002 Safety o f new or existing dams, including tailings dams > 10 policy) meters in height Forestry (Interim 2002 policy) Sustainable forestry practices Cultural Property (Interim Adverse, irreversible impacts on cultural or natural sites having 2002 policy) archeological, paleontological, historical, religious or unique natural aesthetic value Pest Management (Interim Significant use o f pesticides 2002 policy) Projects on International Notification o f projects with significant and adverse impacts on Waterways international waterways in respect to the quantity and quality o f (Interim 2002 policy) water flows to other riparian states, or will significantly and adversely affect present or likely future water use by other riparian states EXTRACTIVE - MIGA’S EXPERIENCE INDUSTRIES AND SUSTAINABLE DEVELOPMENT ANNEX 4: PAGE 47 Operations Evaluation Unit CONFIDENTIAL DRAFT E E Z m e E - z - E E * E E m 1 Q, Q, Y 3: U E m 3 L CA % 5 -- m Y 0 Q, El E E & s LI 0 8 a .I 2 Y h 0 8 s rA Y .I W a a B .. a B ti IA x W 4