Report No. 26373 Extractive Industries and Sustainable Development An Evaluation of World Bank Group Experience (In Four Volumes) Volume III: IFC Experience July 29, 2003 Operations Evaluation Group I N N O TE P O R AT I R N AT I O OR N A C L FINANCE Document of the World Bank Abbreviations and Acronyms AMR Annual Monitoring Report ASM artisanal and small-scale mining CAO Compliance Advisor/Ombudsman (for IFC and MIGA) CAS Country Assistance Strategy EI extractive industries EL4 Environmental Impact Assessment EIR Extractive Industries Review GRICS Governance Research Indicators Country Snapshot GHG greenhouse gas IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund MIGA Multilateral Investment Guarantee Agency NGO nongovernmental organization OED Operations Evaluation Department (World Bank) OEG Operations Evaluation Group (IFC) OEU Operations Evaluation Unit (MIGA) SME small and medium-sized enterprise WBG World Bank Group Definitions Extractive industries for this review include oil, gas, and mining of minerals and metals. Mining for construction materials, including cement production and quarries, is not included, nor are indirect investments through finan- cial intermediaries. Sustainable develoument meets the needs of the present without compromising the ability of 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 of net benefits (beyond the project financiers) obtained from the extraction of mineral resources, the interests of future generations can be protected through the efficient utilization of these revenues for people in the host country. Revenue manapement refers to the collection, distribution and utilization of government revenues. The World Bank Group includes IDA, IBRD, IFC and MIGA. In this report, the combination of IDA and IBRD is referred to as the World Bank or “the Bank.” The evaluation units of the WBG are the Operations Evaluation Department (OED) of the Bank, the Operations Evaluation Group (OEG) of IFC, and the Operations Evaluation Unit (OEU) of MIGA. These units are independent from WBG management and report to the WBG’s Board through the Director-General, Operations Evaluation. Resource-rich and EI-deuendent are used interchangeably for developing countries with average annual export values of oil, gas and mineral products over 15 percent of total exports. This standard was chosen with reference to the WBG’s Poverty Reduction Sourcebook, which states: “A country’s mining sector can play an important role in poverty reduction strategies if the approximate share of the mining sector is ... greater than 10-25 percent of export earnings.” For a list of countries meeting this criterion, see Volume 11, Annex B. Director-General, Operations Evaluation : Mr. Gregory K. Ingram Director, Operations Evaluation Group : Mr. William E. Stevenson Task Manager : Mr. Roland Michelitsch PAGE ii EXTRACTIVE lNDUSTRlESAND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group Contents Preface ................................................................................................................................. v Acknowledgments .............................................................................................................. v i I F C Approvals at a Glance ................................................................................................ vi1 .. 1. Introduction ................................................................................................................... 1 2 . From Economic Benefits to Sustainable Development ................................................. 3 3 . Private Sector Development and Benefits to Investors ................................................. 7 4 . Environmental and Social Issues .From “Do N o Harm” to Sustainability ............. 10 IFC’s Results in Mitigating Negative and Enhancing Positive Impacts ...............13 IFC helping to generate sustainable benefits ........................................................ 16 Challenges in meeting I F C ’ s environmental and social development objectives . 22 5. Disclosure and Consultation ....................................................................................... -26 6 . Governance and Challenges o f Managing Revenues from Extractive Industries .......29 7 . Issues Beyond the Control o f IFC and I t s Clients - Require Effective Cooperation and Action Inside and Outside the WBG ................................................................... 33 8 . Conclusions and Recommendations ............................................................................ 36 Annex 1: IFC’s Investments in Extractive Industries........................................................ 43 Annex 2A: Summary Results . All E1Projects .............................................................. 45 Annex 2B: Performance Ratings for Evaluated E1Projects .............................................. 46 Annex 2C: Performance Ratings for Studied Oil and Gas Projects .................................. 47 Annex 2D: Performance Ratings for Studied Mining Projects ......................................... 48 Annex 2E: Approved Projects Reviewed by OEG . Mining.......................................... 49 Annex 2F: Approved Projects Reviewed by OEG . Oil and Gas., ................................. 51 Annex 2G: Reasons for N o t Rating Projects or Companies .............................................. 53 Annex 2H: Evaluation Framework and Rating Guidelines for Studied Projects .......,...... 54 Annex 3: IFC’s Technical Assistance Trust Fund Activities in E1................................... 56 Annex 4A: Perceptions o f Survey Participants at the EIR Planning Workshop ...............57 Annex 4B: Perceptions of Survey Participants at the EIR Regional Workshops .............. 59 Annex 4C: Perceptions of WBG Staff Surveyed............................................................... 61 Annex 5: Relevant I F C Safeguard Policies. Guidelines. and Procedures ......................... 64 Consultation.............................. Annex 6: Selected Sustainability Guidance Material . 65 EXTRACTIVE .IFC EXPERIENCE lNDUSTRlES AND SUSTAINABLE DEVELOPMENT PAGEiii Operations Evaluation Group Boxes Box 1: Value added .SME linkages ................................................................................... 7 Box 2: Extractive industries and H I V / A I D S ..................................................................... 12 Box 3: Observations f r o m OEG’s site visits and country studies ..................................... 14 Box 4: IFC’s position o n climate change (excerpts) ......................................................... 15 Box 5: Donor supported trust funds contribute to IFC’s sustainability initiative ............. 17 Box 6: L a c k o f similar standards in other financial institutions ....................................... 18 Box 7: ASM - Constructive engagement by a private company .................................... 25 Box 8: IFC’s position regarding revenue distribution and management -highlights .....3 2 Figures Figure 1: E1versus non-E1projects: Similar development. better investment results ........3 Figure 2: Extractive industries: Riskier than others ............................................................ 8 Figure 3: Better development results with better govemance ........................................... 30 Figure 4: Better country govemance - better IFC equity returns for extractive industries and for other sectors .................................................... 3 0 PAGEiv lNDUSTRlES AND SUSTAINABLE DEVELOPMENT EXTRACTIVE . IFC EXPERIENCE Operations Evaluation Group Preface For this study, OEG analyzed a random sample o f I F C projects approved between 1991 and 1996 and evaluated at early operating maturity between 1996 and 2001. The performance o f these 22 evaluated EIprojects was compared to others evaluated in the same time period, us- ing I F C’s established evaluation framework (see www.ifc.o r d o edxp srs/xp srs. html) under three performance dimensions: development outcome, IFC’s investment outcome, and IFC’s effectiveness (Annex 2B). To validate the findings, OEG also conducted a desk review o f all E1projects approved since fiscal year 1993 and older projects s t i l l in IFC’s portfolio. The re- sults o f these 45 studied EIprojects are summarized in Annexes 2C and 2D. OEG also re- viewed IFC’s strategy in the sector, technical assistance trust fund activities (Annex 3), inter- nal documents, and relevant literature. OEG presented an analysis o f IFC’s investments in the sector in its approach paper for this study. More information can also be found in the WBG’s background paper to the Extractive Industries Review (EIR). Both are available online, A brief summary o f the analysis i s in An- nex 1, and highlights are on the next page. Evaluators visited more than a dozen project sites in six countries to assess development re- sults and to talk to representatives from industry, govemment, and civil society (see B o x 3). W e surveyed participants at the EIR workshops about their perceptions: initially, about the most important sectoral issues, to help guide the evaluation (Annex 4A); then, at the regional workshops, about the need for, and effort and success of, I F C and the WBG in the sector (An- nex 4B). OEG also asked I F C staff to what extent the WBG was appropriately addressing key issues in the sector (Annex 4C), and whether coordination in the WBG was adequate. O E G also sought feedback from numerous stakeholders knowledgeable about the sector, inside and outside the WBG. EXTRACTIVE - INDUSTRIES AND SUSTAINABLE DEVELOPMENTIFC EXPERIENCE PAGE v Operations Evaluation Group Acknowledgments This report was written by Roland Michelitsch under the general guidance o f Bill Stevenson, Director o f IFC’s Operations Evaluations Group (OEG). Other contributors include Sid Edel- mann, Rex Bosson, and Dennis Long, who also completed proj ect-level evaluations, con- ducted site visits, and helped prepare the report. Margaret Ghobadi assisted with the analysis o f trust fund activities. Linda Morra, Head o f Special Studies in OEG, provided valuable ad- vice. Pelin Aldatmaz, Nicholas Burke, and Sanda Pesut assisted with data analysis and presen- tation. Cesar Gordillo, Yvette Jarencio, and Elvira Sanchez-Bustamante provided essential support as program assistants. Special thanks to the members o f our advisory panel, who provided unique perspectives and advice: 0 James Cooney, General Manager, Strategic Issues, Placer Dome Inc. Cristina Echavarria, Director, Mining Policy Research Initiative, International Development Research Centre (IDRC) 0 k i n d Ganesan, Director, Business and Human Rights, Human Rights Watch 0 Michael Rae, Program Leader -Resource Conservation, WWF Australia (formerly World Wildlife Fund, now World Wide Fund for Nature) 0 David Rice, Group Policy Adviser, Development Issues, BP Many thanks to all the people we met in the field and in Washington who shared their views about the sector, in particular to those who told us about the impacts that oil, gas, and mining projects had on them personally. The author would also like to thank I F C staff involved with the evaluated projects - either at appraisal or currently - who took time to respond to OEG’s many requests for information and generously shared their knowledge with us. In particular, we thank Clive Armstrong and Monika Weber-Fahr who provided their invaluable perspective from the joint World Bank/IFC Global Products Group for Oil, Gas, Mining, and Chemicals, and R o n Anderson from IFC’s Environment and Social Development Department. vi PAGE INDUSTRIES AND SUSTAINABLE DEVELOPMENT- EXTRACTIVE IFC EXPERIENCE Operations Evaluation Group IFC Approvals at a Glance 9 Following a peak in 1991 ($400 million), IFC approved investments o f about $250 annu- ally in EI. 9 The share o f E1has declined from over 20% in 1991 to around 5% in the last three years. 9 Approvals were concentrated in o i l and gas (54%), gold (14%), and copper (10%). 9 Approvals were concentrated in Latin America (34%) and Sub-Saharan Africa (30%). 9 Approvals were concentrated in countries with high country risk, much more so than IFC’s overall approvals; these countries also predominantly feature poor governance. 9 IFC’s portfolio in E1(as o f June 2002) was $628 million, or 6% o f IFC’s total portfolio. 9 Just over 60% o f the E1portfolio was in mining, and just under 40% in o i l and gas. 9 Just over h a l f was loans, just under half equity. Concentrated in oil&gas, Declining share since 1992 gold and copper IFC approvals since inception ($4.3 billion) 400 I r 25% Oil and . 350 2 h gas a g P (it 300 20% - m a 54% - $ v m $ 250 200 15% a v1 b e B 150 10% k c 4 2 5 I 3 100 i 50 5% 2 i 0 0% Concentrated in Latin America Concentrated in countries with and SubSaharan Africa IFC approvals since inception ($4.3 billion) poor investment climates Sub- --c IFC Overall +Extractive Industries Saharan Africa Middle East L and North Africa 10% R EXTRACTIVE - IFC EXPERIENCE INDUSTRIES AND SUSTAINABLE DEVELOPMENT PAGEvii Operations Evaluation Group 1. Introduction 1. Summary: Overall, IFC support for extractive industries (EI) has been effective, but implementation can be improved, broader sustainability issues better addressed, and results better tracked and reported. Projects usually generated large revenues for governments and opportunities for people. IFC has generally added value, particularly in improving the envi- ronmental’ and social aspects o f projects, but given the sector’s high impact potential i t will need to prevent or mitigate negative impacts better and more systematically. IFC also needs to ensure that i t s environmental and social guidelines and procedures continue to set stan- dards and adapt in line with rapidly improving industry standards; and that i t s projects adapt with them. In pursuit o f i t s sustainability agenda, I F C needs to do more to address the risks that government revenues may not be effectively used for development and poverty reduc- tion, that benefits may not be distributed transparently, and that local communities may not tangibly benefit from E1projects. To enhance the contribution o f IFC’s projects and the sec- tor to sustainable development requires further improvements in project implementation, ef- fective cooperation within the World Bank Group (WBG), and full engagement o f all stake- holders. 2. OEG’s evaluation i s based on the premise that IFC should only support E1projects i f it can help improve the sector’s contribution to sustainable private sector development. Pro- moting sustainable private sector development, and ultimately reducing poverty and improv- ing people’s lives, i s IFC’s mission. Some people feel that the exploitation o f non-renewable natural resources and sustainable development are an inherent contradiction. But most realize that, over the next decades and probably centuries, we will all need oil, gas, minerals, and metals, and that exploration, development, and use will continue with or without I F C and the WBG. The question i s whether the WBG and I F C can improve the sector’s development po- tential by enhancing positive and mitigating negative aspects. W h i l e I F C and the WBG fi- nance only a small share o f the sector’s investment, their actual and potential influence i s of- ten much larger. 3. Sustainable development defined for this evaluation. Sustainable development “meets the needs o f the present without compromising the ability o f future generations to meet their own needs.” An individual mine or o i l field will eventually be exhausted, but E1projects can s t i l l contribute to sustainable development and thus provide a role model for other private investment if they are: 0 economically sound, providing adequate revenues for host countries, which in turn are used for the benefit o f current and future generations; 0 financially sound, providing sufficient returns to reward investors for risk; 0 environmentally sound, adequately mitigating negative environmental effects’ - and, where possible, improving the environment; 0 socially sound, adequately mitigating negative social effects and providing tangible and sustainable benefits for local people. ’ As in IFC’s guidelines, “environmental” aspects include worker health and safety. Environmental effects could b e local (e.g. impacts o n water quality) or global (e.g. contribution t o greenhouse gases through gas flaring). EXTRACTIVE - IFC EXPERIENCE INDUSTRIES AND SUSTAINABLE DEVELOPMENT PAGE 1 Operations Evaluation Group 4. The focus on sustainability in IFC’s E I activities has increased over the past decade. IFC’s sector strategy3 has consistently emphasized the sector’s contribution to government revenues and has focused on countries and projects where the value added by IFC is greatest. Initially, I F C mainly saw i t s role in funding projects without access to commercial finance and in acting as a neutral party between govemment and investors. In the mid-1990s, the strategy was expanded to highlight environmental issues, later to social issues, and later s t i l l to governance and revenue management - how host countries distribute and manage the revenues from EI. In recent years, IFC’s environmental and social specialists have devoted more time to the sector than to any other and have frequently improved E1projects beyond the requirements o f IFC’s policies and guidelines. 5. This increased focus on sustainability reflects the evolution in IFC and the industry. Over the past decade environmental, social, and sustainability concems have become more prominent in the sector. Industry has responded by developing and implementing better stan- .~ dards and techniques to reduce the environmental impacts o f i t s o p e r a t i o n ~Leading industry players now report on sustainability indicators - health, safety, environmental, and most recently social indicators - o f their operations and are working on standardizing the report- ing.’ Industry also recognizes that it must do more to retain i t s “social license to operate,” particularly to broaden the benefits o f wealth creation and thereby contribute to poverty re- duction6IFC’s sustainability initiative, started in the past few years, has similarly heightened the focus on sustainable development results within I F C and beyond. IFC’s E1 operations were often among the first to develop or implement new programs such as SME linkages or I F C and AIDS. Under the sustainability initiative, IFC developed a position paper on revenue management in 2002, which recognized that large government revenues, as they typically occur in E1 projects, require special attention - particularly where country governance i s poor. Indeed, this i s an area deserving special attention from I F C and the WBG. IFC does not have a Board-approved sector strategy for EI, but i t s investment departments discuss their strategies annually with IFC management. While these sector strategies are n o t normally disclosed, IFC has recently started to publish regional strategies for mining (www.ifc.org/mining/region/reaion.html). IFC ceased to invest in o i l and gas exploration in fiscal year 1992, but this was due t o poor results and the difficulties o f assessing exploration risks. Exploration projects in mining are very rare, but IFC has invested at very early stages (exploration o r pre-feasibility study). See, for example, The oil and gas industryfrom Rio to Johannesburg and beyond - Contributing to sustain- able development (2002), by the International Association o f O i l and Gas Producers and the International Petro- l e u m Industry Environmental Conservation Association (IPIECA). Other initiatives in the mining sector, for example, the Mining, Minerals and Sustainable Development Project (MMSD), came to similar conclusions. ’ F o r example, the International Council o n M i n i n g and Metals (ICMM) i s worlung with the Global Reporting Initiative (GRI) o n developing sustainability indicators for the mining industry. Ultimately, this i s expected t o result in a consistent and coherent module for reporting o n sustainable development for mining companies. M i n i n g and Minerals Sustainability Survey 200 1. PAGE2 EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group 2. From Economic Benefits to Sustainable Development 6. Development results in E I were the same as in other sectors. IFC synthesizes devel- opment results o f four indicators - economic sustainability, private sector development, business success, and environmental and social effects - into one “development outcome,” which measures a project’s overall impact o n a country’s development. Fifty-nine percent o f the 22 evaluated E I projects achieved positive results, compared to 60 percent for all other IFC projects.’ The development success rate for all 45 studied projects (65 percent) is slightly higher.8 The “win-win” outcomes - positive development results and good invest- ment results for IFC - are about the same when only evaluatedprojects are considered, and slightly better for all studied projects (Figure 1). While there i s room for improvement, it is important to note that this success rate has been achieved in very difficult country environ- ments, where many development institutions are struggling to achieve positive result^.^ I Figure 1: E1versus non-E1projects: Similar development, better investment results LOW -HIGH Investment Outcome lnvtujtinent Outcome It1veshnt Outcome (a) 45 studied EIprojects @) 22 evaluatedEI projects (c) 286 evaluatednon-EI projects ~ ~ W P ~ y a U s a p p m v e d 1991-96 Appmvad1991-96 7. About three-quarters o f IFC’s E1 projects were economically attractive; results in mining were the same as in other sectors, those in o i l and gas significantly better. Seventy- three percent o f the evaluated E1 projects had adequate economic returns - real economic rates o f retum over 10 percent - compared to 57 percent for other projects. The success rate for o i l and gas (83 percent) was significantly” higher than that for mining (60 percent) and other sectors. Again, these results were achieved in difficult countries, but it i s also important to note several limitations o f the economic rate o f retum: This and other comparisons o f “evaluated” projects relate to a random, representative sample o f 22 IFC pro- jects (12 o i l & gas, 10 mining) approved 1991-96 and evaluated 1996-2001 (results in Annex 2B) using IFC’s standard evaluation framework. F o r desk reviews o f a l l 45 “studied” projects - 22 o i l and gas and 23 mining projects approved since fiscal year 1993 o r s t i l l in IFC’s portfolio - a similar but simplified ratings framework was used (Annex 2E, results in Annexes 2 C and 2D). The results o f a l l studied projects are not strictly comparable, since they have a different maturity profile - older and younger -than the evaluated projects. Also, there are n o comparators in IFC’s portfolio, since IFC does not track and rate development results o n a portfolio basis. The number o f projects i s too s m a l l t o analyze trends. See, for example, World Bank Group Work in Low-Income Countries Under Stress: A Task Force Report (2002), httdiwwwl .worldbank.orgloperationsllicus/. lo “Significantly” used in this report implies statistically significant using a 90% confidence interval. EXTRACTIVE INDUSTRIESAND SUSTAINABLE DEVELOPMENT IFC EXPERIENCE- PAGE 3 Operations Evaluation Group e I t does not take into account the distribution o f benefits - a dollar for the investor i s treated the same as a dollar for government or a dollar spent o n a social program for the poorest. e I t does not address how government revenues are used. e Accounting for the depletion o f natural resources in economic rate o f return calcula- tions i s difficult. IFC uses a depletion premium to account for the non-renewable na- ture o f the resource." e Compliance with IFC's environmental and social requirements was interpreted as an indication that negative externalities had been adequately mitigated; where appropri- ate, we imputed costs o f cleanup as economic costs; however, it i s difficult to quan- tify environmental and social externalities and data i s scarce. 8. Financial and economic project success were closely linked. All 12 projects that were financially successful also provided adequate economic returns. l2In addition, 4 out o f 10 pro- jects that were not successful for investors s t i l l had adequate economic rates o f retum (greater than 10 percent). In three o f them, the government retroactively changed earlier agreements, making otherwise viable projects financially unattractive. 9. Most projects generated large revenues for governments, sometimes even when pri- but vate investors did not do well. These revenues come in many different ~ o T ~ s usually as ,'~ income taxes and r0ya1ties.l~Governments sometimes get revenues even when investors do not do well. For example, I F C has funded projects that failed or ran into financial difficulties. Often, but not always, these companies continue to pay all taxes, including royalties, duties, and transit fees while investors lose money. In other cases, governments faced with the po- tential loss o f jobs and community livelihood, agreed to forgo some taxes until a project turned around. In Eastern Europe, some F C clients faced increasing tax demands that led to financial losses from otherwise viable projects. A Latin American o i l company failed, but i t s assets were bought and rehabilitated and the new company contributed more than $30 million in royalties in 2000. A mining company lost more than $30 million in four years, but was ex- pected to pay about US$5.5 million in taxes. 10. All stakeholder groups recognize that the distribution of benejts and costs is the cru- cial issue in E1 We surveyed stakeholders from many backgrounds - government, industry, NGOs, and the WBG." Among a wide range o f questions covering economic, environmental, social, and governance aspects (Annex 4A), equitable distribution o f benefits was perceived '' Until 1996, IFC effectively valued resources at zero. Since then, IFC has started t o deduct the net present value o f the economic benefits generated from the resource over the projected life as depletion premium. This m a y differ substantially from h o w governments or investors might value the resource, w h i c h will depend o n many factors, such as country and resource risk. l2 Adequate economic returns d o n o t always mean large government revenues. See below o n distribution. l3 There are many different taxation regimes. F o r an excellent overview see Global Mining Taxation Compara- tive Study, J. Otto, 2000, or Review o f Legal and Fiscal Frameworks for Exploration and Mining ( K o h Naito, Felix Remy, John P. Williams, 2001). On o i l and gas, see www.ifc.ora/oamc/pdfs/DanielJohnston.pdf. l4 Oil features higher royalties - and other forms o f "rents" - than mining. Royalties in mining affect the cut- o f f grade and can thus easily make otherwise attractive deposits unviable; in o i l this is less likely, since mar- ginal costs are l o w compared to the resource value. Rents are the excess o f pre-tax benefits over cost, including the minimum return o n capita1 required to attract investment. l5 W e surveyed over SO people at the Extractive Industries Review (EIR) Planning Workshop and about h a l f responded (Annex 4A). Broad and balanced representation o f stakeholders was one o f the workshop's goals. PAGE4 INDUSTRIES AND SUSTAINABLE DEVELOPMENT EXTRACTIVE - IFC EXPERIENCE Operations Evaluation Group to be the most important overall; i t was also among the top two issues in every stakeholder €TOUP. 11. But IFC - and the WBG - has not adequately addressed distribution. In several projects, people outside and even inside the WBG questioned ex-post whether benefits o f E1 projects were distributed fairly. l6 For example, where governments had taken a large equity share, but commodity prices - and fiscal revenues - dropped below expectations, they were later disappointed; or where they had granted income tax exemptions for the first years - often the most profitable for a gold project. We surveyed 33 I F C staff - all E1 sector in- vestment staff and all regional economists or strategists. Only half o f the respondents indi- cated that distribution was adequately addressed in IFC’s E1projects - or in Country Assis- tance Strategies (CASs). Responses by World Bank staff were similar (Annex 4C). Recognizing the importance o f distribution in EI, I F C usually identifies the share o f net bene- fits that accrues to government. But IFC has typically not compared the benefits to other E1 projects or stated whether i t perceives the distribution o f benefits to be reasonable - and has been criticized for this in the case o f the Chad-Cameroon ~ i p e 1 i n e .IlF ~C has also not system- ’* atically tracked actual government revenues during supervision. Recognizing the uncer- tainty about commodity prices, resource quality, and many other factors, I F C typically ad- dresses downside risks for investors in a sensitivity analysis; but IFC did not address how such risk factors affect the distribution o f benefits. 12. Transparency and improved analysis o f the distribution may help prevent later con- flicts. Due to variations in country and project characteristics (e.g., resource quality, taxation regimes, legal entitlements, country risk, etc.) some people question the reliability and rele- vance o f distributional comparisons. But given the importance o f rent distribution - and the history o f conflicts over it19- more comparative analysis i s warranted. Attempts to compare distributions across countries exist, both in the WBG and elsewhere.20World Bank staff we interviewed stated that they could and should be cited to provide a frame o f reference when presenting I F C projects for approval. More transparency o n how the distribution was arrived at, comparing it to other projects, and testing i t s robustness under different scenarios would help reduce potential conflicts and disputes.2’ l6Examples include questioning the appropriateness o f favorable tax exemptions and swap arrangements. l7The Inspection Panel for the Chad-Cameroon pipeline claimed “it was unable to find any analysis justifying the allocation o f revenues between Chad and the Consortium [ o f investors].” W o r l d Bank management stated that it was not a party to the confidential agreement between Chad and the Consortium, but that the reasonableness o f the agreement had been independently studied, and that it had made certain Chad received independent expert advice. ’* This appears t o be changing. IFC has started t o track development results in supervision, and some recent Board Reports for E1projects identify government revenues as one o f the indicators t o b e tracked. l9 See, for example: Breaking the Conflict Trap: Civil War and Development Policy, draft WBG Policy Re- search Report (2003), httd/econ.worldbank.org/m-r/CivilWarPRW 2o Review o f Legal and Fiscal Frameworks for Exploration and Mining ( K o h Naito, Felix Remy, John P. Wil- liams, 2001) compares the fiscal regimes o f 23 countries. Global Mining Taxation Comparative Study, Institute for Global Resources Policy and Management and Colorado School o f Mines (second edition, M a r c h 2000, James Otto et al.) compares the effects o f taxation o n “model” copper and gold mines. An unofficial note o n the WBG’s web site “Best Practices in Dealing with the Social Impacts o f O i l and Gas Operations,” o n Manage- ment o f Government Revenues, cites numerous reference documents and concludes that international practice o f the government’s “take” in o i l and gas i s about 45%-50% at the l o w end and 80%-85% at the high end. 21 For example, a host government has requested an independent “fairness” assessment o f an existing contract with an I F C client company. Routinely providing a resolution mechanism where conflicts between governments and investors arise m a y help settle disputes, and i s n o w often incorporated in agreements between investors and governments. However, years after the contract was signed i t i s even more difficult to assess h o w reasonable a EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE PAGE 5 Operations Evaluation Group 13. “Insuficient ” benefits for local communities are an important development issue - and a commercial risk - that has not always received enough attention. F C has typically not calculated shares accruing to different levels o f government or accruing directly to local communities. I t i s difficult to define “sufficient” benefits. At the least, they should compen- sate local communities for negative impacts and maintain - or improve - their living stan- dards. Where local people oppose projects, businesses risk costly interruption and property damage. In EI, environmental problems are often the trigger for opposition. However, such opposition can often be traced to deeper social issues, for example a long-standing perception o f insufficient benefits. In such situations, companies sometimes spend a lot to build trust or defend themselves, money that could be better spent on community development. Where IFC client companies proactively engage the community and provide benefits for local people - e.g., increased employment or sales, better infrastructure, schools, and housing - they re- duce risk for their operations. But private companies cannot be expected to take over gov- ernment responsibilities - for financial reasons, and because such a solution i s not sustain- able. 14. Benefits from government revenues do not always reach local communities. In many countries where IFC operates, government revenues are not being used effectively for the benefit o f local communities. In some countries, communities received only a very small share o f fiscal revenues - which led to problems. For example, in one case, the “legal” dis- tribution to the provincial authorities was only a small share o f royalties; even that was not consistently distributed, and communities accused local leaders o f embezzlement. In another case, the “legal” distribution to the region was quite high, but usually not forthcoming. Even where money was distributed to the provincial governments, people affected by E1 did not necessarily benefit, due to mismanagement, lack o f transparency and possibly corruption, allocating the money to other parts o f the province, or using it for recurrent administrative expenditures instead o f investing i t to provide sustainable benefits. 15. Volatility of revenues is also a problem, but may be easier to fix. The discussion dur- ing taxation conferences2’ tends to focus on managing the volatility o f revenues from EI, caused by changing commodity prices and the exhaustibility o f the resource. Several “techni- cal” solutions - for example, funds for stabilization or for future generations - are well un- derstood, but the record o f such solutions i s poor, due in part to the secular decline in com- modity prices and in part to poor governance. distribution is, and renegotiating contracts later will also discourage potential future investors. Volume I1 (paragraph 5.16 and Box 5.4) discusses issues related to the acceptability o f benefit distribution. 22 The WBG hosted a workshop o n petroleum revenue management (www.ifc.org/ogmc/petroleum.htm) - - - in Oc- tober 2002; the IMF hosted a sknila; conference in June 2002. PAGE6 lNDUSTRlES AND SUSTAINABLE DEVELOPMENT EXTRACTIVE - IFC EXPERIENCE Operations Evaluation Group 3. Private Sector Development and Benefits to Investors 16. E1 investments were often among the first attractive investment opportunities for p i - vate investors and IFC, followed by other investments. In at least a dozen countries,23 IFC’s first investment was in EI. IFC’s E1 investment was also often the first private investment in the sector, providing important demonstration effects. Investments in other sectors -by I F C and others - often followed. In recent years, I F C has increasingly focused o n enhancing SME-linkages in connection with i t s E1 investments (Box 1) and o n supporting EI-related projects with trust funds. ~~ Box 1: Value added SME linkages IFC’s environmental and S M E departments increasingly work with project sponsors, aid agencies, and nongov- ernmental organizations (NGOs) t o develop programs promoting sustainable economic development in areas affected by E1projects. Examples o f programs to set up or strengthen micro-finance organizations, training pro- grams, and technical advice for local businesses include: Mozal Aluminum Smelter, Mozambique IFC worked with M o z a l t o develop local business capacity t o compete for product and service contracts - transport, catering, cleaning, and security. F o r these, M o z a l broke i t s contracts d o w n into smaller compo- nents (to attract local competition) and n o w spends about US$35 m i l l i o n annually with private local com- panies. As part o f Mozal’s Community Development Trust, which tries to maximize positive impacts for the local community, f a r m extension services have been provided to 1,200 farmers. An ongoing linkage supply program developed by the IFC-managed Africa Project Development Facility (APDF) helps s m a l l businesses win and deliver M o z a l phase I1construction contracts. Chad-CameroonPetroleum Development and Pipeline Project The WBG worked closely with the sponsors t o put in place features t o ensure economic benefits for local businesses - to date more than $340 m i l l i o n has been spent, more than $139 m i l l i o n in Chad alone. Ongo- ing training enables SMEs t o win pipeline-related contracts. The Support and Training Entrepreneurial Program (STEP) was launched in Chad by IFC t o train university graduates t o consult, train, and develop small- and micro-enterprises. Already 14 field officers are working with more than 150 enterprises. I F C i s working with the U.S. organization Africare to implement a project t o provide food t o petroleum workers in the short term and t o the general population in the long term. Eight enterprises have been cre- ated and more than 120 people have received training and financing. Yanacocha Gold Mine, Peru I F C i s working with Yanacocha to implement a Rural and an Urban Development Program. M a n y program components have been implemented with NGOs, rural communities, and the city o f Cajamarca. Yanacocha and external donors have respectively provided more than $15 m i l l i o n and $7.3 m i l l i o n for these programs. Local SMEs supplying goods and services participate in quality management training focused on interna- tional business practices and environmental and safety standards t o improve productivity and win Yanaco- cha contracts. A training program equips tradesmen to participate in the construction o f a housing complex that will be developed over the next five years. Also, S M E suppliers o f components, such as window frames, are being assisted. Another program has been established to build local farmers’ capacity t o supply the mine’s canteen and n ceramics and textiles have been identified for training in design, produc- hotels. Similarly, local artisans i tion, and marketing and are supported at local and international trade fairs. Data provided by the WBG’s SME department and summarized by OEG 23 Chad (2000), Chile (1957), Gabon (1982), Ghana (1984), Guinea (1982), Guinea-Bissau (1989), K y r g y z Re- public (1995), Mauritania (1968), Russian Federation (1993), Tajikistan (1996), Uzbekistan (1994), Zimbabwe (1981). E1projects have been among the f i r s t investments in several other countries. EXTRACTIVE - IFC EXPERIENCE INDUSTRIES AND SUSTAINABLE DEVELOPMENT PAGE7 Operations Evaluation Group 17. Financial returns -for IFC and other investors - were better than for other sectors. OEG evaluates both business success - whether projects were attractive for all - and IFC’s o w n investment results. Business success was better in E1 (55 percent positive) than in other sectors (44 percent). While this re- sult i s not significantly different, i t i s noteworthy Figure 2: Extractive Industries: that it was achieved in very difficult country cir- Riskier than Others 22 E1 projects compared to 165 other projects cumstances. Controlling for country risk, the Evaluated 1996-2001 business success o f E1 projects was significantly 80% 0 El Rolccu Non.EI Pmiects 1 - 7 better than for other projects, indicating that E1 projects can be among the few attractive invest- ment opportunities in difficult countries. IFC’s 40% investment results o n a portfolio basis are also E 20% substantially better than in other sectors, enhanc- 10% ing IFC’s overall profitability and helping to sup- 0% Negative 0% 20% to 20% ami Above Financial rate ofretum port IFC’s activities in other sectors. 18. ... butfinancial risks were also higher. For investors the sector i s also riskier than others. For example, while E1projects featured more extremely positive financial results (fi- nancial rates o f retum > 20 percent), they also featured more financial losses (Figure 2). IFC’s equity investments in E1are as likely to succeed as those in other sectors - about one- third o f the time - but successful investments are more likely to result in large retums. IFC’s strong portfolio results are carried by a h a n d h l o f very big winners. In all o f them, IFC invested early in the project’s development, taking considerable risk. Overall in the portfolio, such winners tended to be concentrated in Latin America, in countries with at least reason- able governance, and in oil, gold, and copper -the largest exposures by s u b - ~ e c t o r . ~ ~ 19. The main drivers o f project business success were quality o f management and the re- source; commodity prices; and the country’s govemance and investment climate. Among the studied projects, the following tended to be the main business success drivers: 0 Quality o f management: Strong management and a financially committed sponsor are crucial to deal appropriately with production challenges and market downtums -but were sometimes missing. 0 Quality o f the resource: Only resources that are globally cost-competitive are likely to result in attractive financial returns. IFC and the sponsors have sometimes overesti- mated the quality o f the resource or - put differently - underestimated the difficul- ties and costs to extract and process it. 0 Commodityprices: The 1990s have been a decade o f falling prices for many commodi- ties. For example, from 1990 to 1998 o i l prices dropped in real terms by over 40 per- cent, gold by over 20 percent, and copper by almost 40 percent. This has had negative effects on the projects IFC supported, and shows the importance o f investing in the lowest-cost producers. Several commodity prices have since recovered, so the current outlook i s probably brighter than at the evaluation stage. 24 The benchmark for a satisfactory business success i s whether the real (inflation-adjusted), after-tax financial rate o f return exceeds a company’s estimated weighted average cost o f capital. 25 Annex 1 contains more information o n IFC’s E1 investment activities. PAGE a EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group 0 The host country environment: Taxation regimes are an important determinant of re- turns to investors, as are other features o f the enabling environment. In several cases, viable projects had poor returns to investors because o f government actions, such as ret- roactively increased taxation or transit fees. Better regulatory quality was significantly correlated with better financial results, as was political stability, which was also signifi- cantly correlated with better development results and environmental effects. EXTRACTIVE - IFC EXPERIENCE INDUSTRIES AND SUSTAINABLE DEVELOPMENT PAGE9 Operations Evaluation Group 4. Environmental and Social Issues - From “DON o Harm” to Sustainability 20. IFC has continually expanded the scope o f its environmental and social assessment. In 1988189, IFC began i t s own reviews and appointed i t s first environmental advisor.26Ini- tially, I F C followed the World Bank’s safeguard policies, guidelines, and procedures, but gradually I F C developed i t s own, better adapted for the private sector. From 1993, IFC de- veloped sector-specific guidelines for areas not covered by the World Bank’s existing guide- lines and adopted specific procedures for environmental review in 1992/93. In 1998, after extensive consultation, I F C revised i t s review procedures and adapted several safeguard poli- cies for the private sector. I t also developed a policy statement on harmhl child and forced labor (the World Bank lacks such a policy).27Also in 1998, the World Bank updated i t s Pol- lution Prevention and Abatement Handbook28(PPAH), providing industry-specific guidelines that apply to WBG projects. I F C continues to modify its operating procedures and to develop additional industry-specific guideline^.^' 21. Lessons from experience lead to changes in policies, guidelines, procedures, and practices. Based on past evaluation findings, OEG has also made numerous recommenda- tions with respect to environmental and social safeguard policies, guidelines, and procedures, many o f which have been implemented. IFC’s Environmental and Social Development De- partment also feeds lessons from practical experience and research into upgrading procedures within the department. For example, IFC introduced a guideline on hazardous materials han- dling, in part motivated by the Yanacocha mercury spill and the Kumtor cyanide spill. I F C produced a guideline for offshore o i l and gas projects before investing in Early Oil, Azerbai- jan. Thus, the body o f policies, documents, and procedures that codify IFC’s environmental and social operating procedures and practices i s constantly adapting. The recently completed safeguard policy review by the Compliance Advisor Ombudsman (CAO) i s likely to also re- sult in changes. 22. IFC increased staffing in support o f the increased focus on environmental and social issues, Starting with one staff, I F C hired additional environmental and later social experts between 1990 and 2002, and currently employs almost 40 specialists. Their role is to appraise and supervise projects to ensure that projects financed by I F C meet the applicable environ- mental and social safeguard policies and guidelines, and improve projects “beyond compli- ance.” In recent years, IFC’s environmental and social experts have spent more time on E1 than on any other sector, highlighting the sector’s high impact potential in this area. 23. IFC categorizes projects based upon their potential environmental and social impact. When a project i s first presented to IFC, the environmental and social specialists categorize i t according to i t s potential negative impact. The categorization determines how I F C appraises and supervises a project and what actions will be sought from the clients. A category A30pro- 26 Before that, the W o r l d B a n k reviewed the environmental aspects o f IFC’s projects, using guidelines initially published in 1984 and revised in 1988. 27 Available o n line at h~:ilwww.ifc.orgienviroiEnvSoclchildlaborichildsafe~uard.htm. Available o n line at h~://www.ifc.org/enviro/enviro/vollution/8uidelines.htm 29 Ibid. 30 Category A projects are “likely to have significant adverse environmental impacts that are sensitive, diverse, o r unDrecedented.” They - - require . . environmental and social baseline conditions; (b) EIAs that normally cover (a) potential environmental and social impacts (direct and indirect), including opportunities for enhancement, cu- PAGE IO INDUSTRIES AND SUSTAINABLE DEVELOPMENT EXTRACTIVE - IFC EXPERIENCE Operations Evaluation Group ject - considered likely to have significant adverse environmental and social impacts, unless prevented or mitigated -requires peer review, triggers a detailed and disclosable assessment document (Environmental Impact Assessment, or EIA), a public consultation process, and frequent supervision throughout the life o f the project. A category B project - with lesser potential impact than category A - has a narrower environmental assessment, requires only submission o f an environmental summary and, in practice, receives less direct supervision. Some NGOs have criticized IFC for “under-categorizing” projects, and have argued that all EI-projects should be category A. Management - and the C A O - maintains that projects should be categorized reflecting their impact potential. O E G usually found projects to be ap- propriately categorized, but given unclear guidance and lacking documentary explanation i t is sometimes difficult to understand the rationale for categorization^.^^ Even so, IFC some- times goes beyond the requirements for category B projects, for example, subjecting them to independent audits. 24. E I projects have high potential for negative environmental and social impact. About 40 percent o f IFC’s E1 investments are category A (most others are B), compared to 3 per- cent o f IFC’s non-E1 investments. More than 40 percent o f IFC’s total category A invest- ments are thus in EI. This indicates the high environmental sensitivity o f the sector and IFC’s commitment to thorough environmental review and monitoring o f the sector. In support o f this commitment, IFC’s environmental and social specialists spent one-third o f their time on the E1portfolio in fiscal year 2002. 25. Resource-rich countries are more likely to have problems achieving important devel- opment goals. The WBG has assessed the likelihood that countries will achieve important Millennium Development OEG then analyzed whether EI-dependent countries were more or less likely to achieve the Millennium Development Goals than other developing countries. Only the goal o f reduced child malnutrition was much more likely to be achieved in EI-dependent countries (likely or possible in 67 percent o f countries) than in others (51 percent). EI-dependent countries were less likely to achieve almost all other goals, most no- tably increasing access to clean water (58 percent versus 72 percent), reducing child mortal- ity (46 percent versus 65 percent), maternal mortality (45 percent versus 59 percent), and HIV/AIDS (50 percent versus 63 percent). I F C has recently started an initiative against HIVIAIDS, with 6 o f 14 engagements with client companies working in the E1 sector (Box 2) * mulative impact, and other anticipated developments; (c) systematic comparison o f feasible alternatives, sites, technologies, and designs; (d) preventive, mitigating, and compensatory measures; (e) capacity for environ- mental and social management and training programs; ( f ) detailed results o f the public consultation and disclo- sure program; and (g) monitoring. I t usually quantifies: capital and recurrent costs, environmental and social staffing, training, monitoring requirements, and the benefits o f proposed alternatives and mitigation measures. See www.ifc.ornlenviro/EnvSoclESRPles~.htm. 31 F o r example, a feasibility study for a project that would - if implemented -be categorized as ‘A’ was categorized as ‘C’ (no impact); an exploration project potentially affecting a nature reserve and indigenous peo- ple was categorized as ‘B,’ The CAO’s safeguard policy review found that decisions about categorizations “may be inconsistent and non-transparent.” IFC’s Environment and Social Development Department conceded that consistent categorization was difficult. This suggests a need for better guidance, transparency and peer re- view. 32 F o r a more detailed description o f the M i l l e n n i u m Development Goals see www.develoDmentgoals.org. W e did n o t have sufficient data to analyze performance for the important goal o f poverty reduction. Also, OEG’s analysis did not control for other factors that m a y affect achievement o f M i l l e n n i u m Development Goals, such as, for example, income per capita. EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE PAGE 11 Operations Evaluation Group Box 2: Extractive industries and HIV/AIDS The majority o f the private sector, including most o f IFC’s clients, i s s t i l l not meaningfully involved in coun- teracting HIV/AIDS, a disease that affects communities, workers, and managers. Businesses will feel the impact o f H I V / A I D S most clearly through their workforce, with direct consequences for a company’s profit- ability. Some sectors are more risky than others regarding HIV transmission. Extractive industries tend to be particularly at risk, since they usually provide employees with salaries that are significantly higher than those o f the general population and their operations also rely o n a workforce separated from their families for long periods o f time. Such conditions have systematically contributed to high-risk behavior, in extractive indus- tries and in related activities, such as infrastructure construction and transportation. The rural settings o f E1 operations, which - unllke more urbanized areas - often lack government health, education, and preven- tion programs, further increase the level o f risk. Thus, the communities inwhich extractive industries operate have a heightened A I D S risk. The figure below also illustrates that resource-rich countries are less likely to achleve the Millennium Development Goal o f halting or reversing A I D S by 2015. HIV/AIDS: Worse in resource-rich countries Likelihood o f achieving the Millennium Development Goal o f halting or reversing AIDS by 2015. 32 resource-rich countries 52 resource-poor countries (Excludes 17 countries without data) (Excludes 54 countries without data) 34 4% 52% 1 0 Likelv 0 Possible E Unlikelv BVerv Unlikelv 1 10Likely Possible E Unlikely .Very Unlikely 1 The program “IFC Against AIDS” provides guidance to its clients to design and implement education, pre- vention, and care programs in support o f employees and the communities in which they work and live. Under this initiative, I F C has to date worked with 10 clients (four in EI) o n H I V / A I D S programs and i s starting to engage with four more (two in EI). With the help o f trust funds, I F C is also working o n putting together an H I V / A I D S t o o k t that would help mining companies become effective partners in the prevention and treat- ment o f HIV/AIDS, both for the mining workforce and the communities dependent o n the mines. The as- signment i s to identify, evaluate, and disseminate selected examples o f public-private partnership approaches to H I V / A I D S prevention and treatment in the mining sector that have proved to b e workable and cost- effective. Among the clients with w h o m I F C has worked i s Mozal, an aluminum producer in Mozambique, which has a strong H I V I A I D S program in place that includes education and awareness, voluntary testing and counseling, and supplementing medication available at local hospitals. For more information on the pro- gram, see Mozal’s Health, Safety, Environment and Community Report (www.mozal.com). For more information on IFC’ s initiative, see www.ifc.org/test/sustainability/docs/IFC-against-AIDS.pdf. PAGE 12 EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group IFC’s Results in Mitigating Negative and Enhancing Positive Impacts 26. Mixed environmental and social results for EIprojects. Using only the random sam- ple o f detailed evaluation^,^^ the results for mining (4 o f 10 projects, or 40 percent rated posi- tive) are significantly worse and those for o i l and gas (11 o f 12, or 92 percent are significantly better than those for other projects (65 percent). Using the broader, but less in- depth analysis o f the entire portfolio,35the positive results for o i l and gas (94 percent posi- tive) are confirmed; mining projects (62 percent positive) are not different from the IFC av- erage (65 percent). For mining, the better performance o f the broader portfolio o f studied projects, compared to the evaluated sample, indicates that, on current outlook, performance has To validate results from the evaluations and desk reviews, OEG staff visited 13 E1projects (Box 3). Each field visit included an environmental specialist with E1 experi- ence or a mining engineer. The field visits confirmed for the most part the information in IFC’s files. 27. IFC’s o i l and gas projects performed well, but there are issues beyond compliance. The o i l and gas sector i s dominated by multinationals that in recent years have stated their commitments to improve performance and enhance sustainability and are also disclosing re- sults achieved. OEG’s analysis also found that the performance o f projects sponsored by ma- j o r multinationals was much better than that sponsored by smaller companies. IFC could use- fully transfer knowledge and disclosure standards from these companies to less-progressive . ~ ~ o i l and gas projects have an al- companies to improve overall sector ~ e r f o r m a n c e While most spotless compliance record, OEG observed one instance o f non-compliance with re- spect to wastewater discharges, which was later corrected. In another case, an o i l pipeline (replacing truck traffic) in an area later designated as national park raised complex environ- mental and social issues. When IFC exited two years after disbursement, the project was not in full compliance with IFC’s requirements, but the sponsor was working toward it. Other projects raise issues beyond IFC’s requirements. 33 Twenty-two projects approved 1991-96 and evaluated 1996-2001, 10 in mining and 12 in o i l and gas. 34 There was insufficient information t o rate the 12th project, since IFC h a d exited f r o m the investment. 35 The portfolio analysis i s mainly based o n desk reviews, even though some o f the results were verified through OEG’s 13 field visits. I t excludes 14 projects that were considered immature and 5 projects f r o m w h i c h IFC had exited and insufficient information for an overall assessment was available. I t also “summarizes” rat- ings for multiple projects in the same company and takes into account longer-term developments than the typi- cal five-year span o f the more detailed evaluations. See Annexes 2 E and 2F. 36 Ratings for the sample o f evaluated projects were not updated t o incorporate n e w information, t o remain comparable with those o f non-E1 projects in the same sample and allow for meaningful statistical analysis. F o r the studied projects, such n e w information was incorporated. For example, in several cases material problems had later been corrected and OEG considered that the earlier shortfalls were n o t material enough t o warrant a rating less than satisfactory. Also, the evaluated sample included 199 1-92 projects, some with environmental problems, that were n o longer considered in the studied portfolio (approvals since 1993 and current portfolio). 37 F o r example, some companies have established a zero flaring goal. Shell’s and BP’s sustainability reporting i s considered among the best in the o i l industry. See for example www.sustainabilitv.com for the “Top 50” cor- porate reports. EXTRACTIVE - INDUSTRIES AND SUSTAINABLE DEVELOPMENT IFC EXPERIENCE PAGE 13 Operations E v a l u a t i o n Group Box 3: Observations from OEG’s site visits and country studies OEG staff visited 13 projects in 6 countries.a Evaluators analyzed the overall country and sector con- text, reviewed first hand the impact o f IFC’s projects (and to a lesser extent other projects) and asked representatives from government, c i v i l society, industry, and the WBG about their perceptions. The m a i n observations were: E1projects, their relations with communities and their impacts are extremely complex. For the most part, the field visits confirmed information in IFC’s files, but they also found sur- prises - good and bad - demonstrating that, even with diligent supervision from Washington and occasional field visits, IFC will always be struggling to remain fully informed. IFC projects usually brought direct jobs and other opportunities; most projects improved access to infrastructure and services for many people, often in remote areas. Some client companies were especially proactive in trying to increase these opportunities for lo- cal people by providing training for potential employees and suppliers - sometimes with IFC’s help. Opportunities attracted people from outside the project area; their influx sometimes caused envi- ronmental and social problems for the existing community; particularly where the capacity o f lo- cal governments was weak, companies found it difficult to cope. N o t everyone benefited, and negative environmental and social impacts were not always ade- quately mitigated. IFC-supported projects appeared to operate to higher standards than others; nevertheless, NGOs focused their criticism o n projects supported by IFC, other international financial institutions and multinational companies, perhaps because they felt they had more leverage there than at the na- tional level. NGO criticism alerted IFC to problems o n several occasions; but some criticism was unwar- ranted, and views expressed by different NGOs - e.g., local versus international - sometimes differed substantially. The very strong contribution by IFC’s environmental and social development specialists in sev- eral projects was acknowledged by clients and communities with whom they interacted. But these interactions often came late, responding to problems rather than proactively preventing them -which would have been more effective and cheaper; more systematic tracking o f key risk factors could have prevented some problems. Companies that consulted early and continuously with the local community had more effective support programs that did not necessarily cost a lot, but established trust and support. Once the trust o f the local community i s lost - for example, following an accident - companies find it very costly to regain it. Affected communities usually saw few benefits from the taxes and royalties companies paid to governments - either little money flowed back or i t was not effectively used. Companies were expected to make up for the lack o f government services and many o f them did a lot: providing roads, water, or power; or supporting education and health services for the com- munity. But companies are wary o f taking o n too much: not only can it be costly and create fur- ther expectations, i t also creates an unsustainable dependency o n a limited-life E1project. Several clients asked OEG about best practices with respect to social, environmental, health, and safety issues. There i s much potential t o share best practices among IFC’s client companies; for example, one mining company gave sewing machines to village women who, once they had de- veloped skills making uniforms for the mine, began to export clothing. a. Argentina, Brazil, Ghana, Kazakhstan, Kyrgyz Republic, Peru. In one country (Kyrgyz Republic) the focus was mainly on the environmental and social performance of the project. PAGE14 EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group 0 First, several projects feature routine gasflaring. W h e n they were approved, this was n o t covered by a specific guideline. E v e n today, the WBG guidelines for onshore o i l and gas projects are not v e r y specific on this issue, particularly w h e n compared to m o r e recent IFC offshore guideline^.^' In a n y event, i t was difficult t o establish the extent o f the problem, since IFC management does not systematically track gas flar- ing - or greenhouse gas (GHG) emissions - f o r a l l portfolio projects. IFC will cal- culate GHG emissions for future projects (see Box 4 on climate change), but i t i s un- clear whether they will also b e tracked during supervision. Also, the WBG i s n o w leading a global gas flaring reduction initiative, w h i c h includes - as a first step - tracking gas flaring, f o l l o w e d by a n u m b e r o f possible steps to reduce the p r ~ b l e m . ~ ’ 0 Second, transportation o f o i l c o u l d have been addressed m o r e thoroughly in some cases. For example, N G O s raised concerns about spills from pipelines used by, but n o t part of, IFC projects. In another project, OEG discovered that environmental staff were unaware that a project had started to transport o i l u s i n g trucks and rail rather than the originally anticipated pipeline, and environmental management o f this trans- port m o d e appeared insufficient. T h e environmental i m p a c t o f the transportation in- frastructure for IFC’s o i l and gas projects has n o t always b e e n a focus in the past, but recently IFC has b e g u n to pay m o r e attention to this issue. However, i t c a n b e a diffi- cult issue to address, since i t i s o f t e n “beyond the fence line” o f control by the project sponsors. Box 4: IFC’s position on climate change (excerpts) IFC recognizes the long-term risk from climate change. While the K y o t o Protocol puts the main re- sponsibility for reducing greenhouse gas (GHG) emissions o n developed countries, IFC believes it can have a role in reducing the GHG intensity o f economic activity in developing countries. I F C re- quires that environmental assessments for each project consider global environmental aspects, includ- ing climate change. GHG emissions are quantified and disclosed for projects with potentially signifi- cant emissions. IFC actively promotes market-based solutions. In particular, IFC: Seeks to reduce methane and carbon dioxide emissions in hydrocarbon extraction projects; Will invest in cleaner coal projects that demonstrate best practice in addressing environmental and social issues; Will support low-cost energy solutions for developing countries (in parallel with WB policy re- form); Pursues projects generating GHG emission reduction credits, and establishes relationships with potential buyers; Uses concessional funding (Global Environment Facility - GEF) to promote renewable energy and energy efficiency where appropriate; Devotes substantial resources t o find, develop and fund projects for renewable energy; Will support funds to purchase GHG emissions credits when the market i s ready; and Pursues projects that reduce losses in power transmission and distribution. (httr,://www.ifc.org/test/sustainability/docs/Climate Change 1FC.pdf) 38 IFC’s 2001 offshore guidelines require: minimize l o w pressure and eliminate high pressure flaring (or justify where t h i s is not possible); eliminate continuous venting and minimize emergency venting; calculate annually GHG emis- sions. The World Bank’s 1998 onshore guidelines just state “minimize flaring” but “flaring i s preferable to venting.” 1 a s . h t m . EXTRACTIVE - IFC EXPERIENCE INDUSTRIES AND SUSTAINABLE DEVELOPMENT PAGE15 Operations Evaluation Group 28. M i n i n g projects, particularly gold, had some environmental problems. The broad range o f environmental and social issues facing mining projects require a strong focus by the sponsoring company just to achieve compliance with IFC’s guidelines. Gold mining projects - the largest share o f IFC’s mining projects - had a higher incidence o f reported problems. Gold production usually involves toxic materials (e.g., cyanide, mercury, arsenic), and weak- nesses in their handling were the most frequent problem. In response, I F C has developed a hazardous materials management guide, but as yet has not urged all i t s existing client com- panies to follow it. IFC also participated in the steering committee developing the Cyanide Management Code.40 29. F o r a positive rating, projects need to be, over their lifetime, in material compliance with IFC ’s at-approval requirements, which are considered a proxy for what IFC considered acceptable environmental perfonnance. Projects are thus not measured against current re- quirements, unless at-approval requirements were clearly out-of-line with sound environ- mental practice in place at the time.41 Thus, some projects rated satisfactory would not com- ply with current standards. Given the rapid evolution o f industry standards, I F C may consider: Continuously updating guidelines and policies as industry standards evolve; Routinely advising clients when IFC updates guidelines; Identifying and documenting any shortfalls against the latest guidelines during super- vision and urging clients to comply voluntarily; and For future projects, perhaps contractually obligating clients to achieve compliance with updated guidelines; however, this may be difficult to negotiate, since clients are unlikely to subscribe to a “moving target.” IFC helping to generate sustainable benefits 30. Community Development - the shift from “do no harm ” to “doing good. ” IFC’s pre- vious focus on mitigating negative impacts to ensure compliance with safeguard policies i s increasingly moving toward a focus on enhancing positive socio-economic impacts in i t s E1 projects as part o f a broader sustainability initiative. For example, in 2000, IFC issued guidance on community de~elopment.~’ The WBG’s Small and Medium Enterprise (SME) Department has worked with several communities to assist in the development o f small busi- nesses in connection with high profile projects, with a particular focus on EI.43IFC policy encourages community development plans, but has not made them mandatory for E1 pro- ject~.~~ 3 1. IFC often goes beyond the guidelines and policies. OEG has observed that in many cases, IFC establishes internal procedures for appraisal and supervision o f projects that go 40 The code can b e found at www.cvanidecode.org/thecodelthecode.PDF. 4’ IFC’s policy requires that “all i t s operations are carried out in an environmentally and socially responsible manner.” 42 Community Development Resource Guidefor Private Companies (IFC, 2000), h#x//www.ifc.or.4enviro/Publications/Communitv/IFC CDR Guide.udf. Also, the W o r l d Bank M i n i n g De- partment hosted a conference o n L o c a l Management o f Mineral Wealth, June 2002. 43 Examples o f S M E linkage programs in E1include: Chad-Cameroon Pipeline; K y r g y z Republic - Kumtor G o l d Mine; Mozambique - M o z a l Aluminum Smelter; Nigeria -Niger Delta Contractor Credit Facility. 44 An IFC specialist for social development expressed some frustration that investment staff sometimes resist community development plans since they are not mandatory (unless the project involves resettlement). PAGE 16 EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group beyond the minimum standards o f the published guidelines. For example, even where they were not required, I F C has: 0 helped clients implement community development plans, sometimes using trust funds (Box 5 and Annex 3); 0 helped clients with HIV/AIDS initiatives (see B o x 2); 0 requested cumulative EIAs; and 0 encouraged some clients to adopt the new hazardous materials management guidelines. Box 5: Donor-supported trust funds contribute to IFC’s sustainability initiative Since 1994, through IFC’s Trust Fund Unit, donors have spent $3.5 million to support technical assis- tance for 22 EI-related projects - mostly in the past three years (Annex 3). Increasingly, technical as- sistance supports sustainable development, including a conference in China to improve the investment climate for sustainable mining, and a global initiative to disseminate examples o f successful approaches to HIV/AIDS prevention. So far, the projects appear to have been broadly successful. However, because Project Completion Reports have often not been prepared, OEG was unable to assign project ratings. Technical assistance demand by the E1sector - focusing o n social and environmental development - i s likely to grow. Through better traclung, IFC would be in a better position to understand and commu- nicate the impacts o f i t s technical assistance program to i t s donors and the public. 32. The WBG has developed policies, guidelines, practices, and procedures that are set- ting standards and help improve the sector’s contribution to sustainable development. Many observers - international organizations, government, industry, and NGOs - concur that the World Bank Group’s requirements and guidelines set a high A 2001 UNEP study observed that the participation o f multilateral financial institutions significantly raises the environmental and social standards o f a project. Other multilateral (e.g., European Bank for Reconstruction and Development, Inter-American Development Bank) and bilateral institu- tions reference and some use IFC and World Bank guidelines. Several government officials have commented that WBG guidelines are an important benchmark when setting local stan- dards. Industry also sees positive value: 95 percent o f clients in E1 saw IFC’s requirements as primarily helpful to their long-term interest, compared to only two-thirds o f all clients46. Some clients and even other companies list in their annual report that they comply with I F C guidelines4’ and several industry representatives commented that IFC’s and the WBG’s guid- ance materials -particularly on social issues - are very helpful. For example, I F C has pub- lished “good practice” manuals on public consultation, resettlement, HIV/AIDS, child labor, 45 A United Nations Environment Program (UNEP) study, The Role o f Financial Institutions in Sustainable Mineral Development, 2002, recommended benchmarking projects against international standards, such as the WBG guidelines (www.mineralresourcesforum.orgldocslt>dfslzemek.t>d~. A 2001 study for Japan’s Ministry o f the Environment considered WBG guidelines t o b e the highest among international financial institutions (hthxllwww.env.go.iplenJiealvO06-04.~df). Industry associations (OGPIIPIECA study, Key questions in manag- ing social issues in oil & gas projects, www.iDieca.org/downloadslsocial/imt>act assessment.t>df, 2002) recog- nize that WBG policies and guidelines set de-facto standards where others do not exist - for example o n reset- tlement. These positive views were confirmed by OEG’s own evaluations, research, and interviews. 46 The Environmental and Social Challenges o f Private Sector Projects: IFC’s Experience (2002)) h~:llwww.ifc.orgl~ublicationsl~ubs/loelloe8lloe8. html 47 This can put IFC in a difficult position, since it does n o t disclose the environmental performance o f projects. F o r example, one client claimed compliance even though an evaluation had just established material non- compliance. Clearly IFC cannot verify claims o f non-clients. EXTRACTIVE lNDUSTRlES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE PAGE17 Operations Evaluation Group and community de~elopment.~’ By publishing guidance4’ on topics such as mine closure and community development, by hosting workshops and participating in, or leading sector initia- tives, the WBG i s highly visible, taking a leadership role in improving environmental and social impacts. In 2003, some o f the largest private project finance banks have committed to adopting I F C safeguard policies and guidelines, thus broadening their reach.50Nevertheless, many other financial institutions and export credit agencies s t i l l lack such standards (Box 6). Box 6: Lack o f similar standards in other financial institutions M a n y businesses recognize that “addressing sustainable development i s critical to their long term sur- vival, and to delivery o f enhanced shareholder value.”a But there i s also much concern that similar standards do not apply to everyone. NGOs use WBG guidelines to point out weaknesses in other fi- nancial institutions’ requirements and are concerned about a “race to the bottom.”b UNEP noted in 2001 that, despite some progress since 1999, most export credit agencies (ECAs) were lacking ade- quate environmental and social requirements - all the more worrisome since their investment vol- ume in the sector i s much larger than that o f the multilateral institutions. Some IFC investment staff expressed concerns about losing business to financial institutions with lower standards when IFC cannot convince potential clients that IFC’s guidelines are in their o w n long-term interest. OEG found that NGOs are often vocal critics o f projects supported by international financial institutions and mul- tinational corporations, but do not necessarily raise similar concerns about local or state-owned com- panies with worse performance. a. For example, Mining & Minerals Sustainability Survey 2001: A PriceWaterhouseCooperssurvey o f 32 world-class min- ing and minerals organizations. b. Numerous examples include ECA-Watch (www.eca-watch.org/problems/imuacts.html) demanding to “stipulate World Bank and OECD DAC (Development Assistance Committee) standards as the minimum acceptable” for export credit agen- cies. 33. Nevertheless, some guidelines are inconsistent, incomplete, or missing. Given the WBG’s high visibility, it is particularly important that i t s guidelines be regularly updated and conform to at least “good practice” standards in the industry and among financial institutions. I F C did not update i t s safeguard policies for several years and some are now inconsistent with World Bank guideline^.^' For example, staff told O E G that IFC projects now must com- ply with a draft, non-public version o f the 1999 policy on safety o f dams, not with the 1996 version on IFC’s web site, nor with the 2001 World Bank policy. Similarly, IFC does not use the “new” World Bank 2001 involuntary resettlement policy but the “old” 1990 policy, com- bined with a resettlement handbook, which i s appreciated by practitioners, but not manda- tory. While O E G was told that what applies i s clear to IFC’s specialists, to any outsider it must appear extremely confusing. There are also numerous examples o f inconsistent or in- complete IFC guidelines. For example: Requirements for closure plan hnding differ for dif- ferent types o f mines (coal, open pit mining, base metal mining). I F C promised specific guidelines for cyanide leaching in gold mining in 1998, but these have yet to be published. Ongoing consultations are seen as critical for enhanced community development, but not re- 48 Available on l i n e at httD://ifchq14.ifc.org/A~~s/OSD/IOToo~it.nsflResource?OpenFrameSet 49 See, for example, the guidance notes at www.ifc.orplenviro/EnvSoc/ESRP/Guidance/. 50 Banks adopting the so-called “Equator Principles” - a voluntary set o f guidelines based on the social and en- vironmental policies o f I F C and the World Bank - are ABN A M R O Bank, N.V., Barclays PLC, Citigroup, Inc., Credit Lyonnais, Credit Suisse Group, HVB Group, Rabobank, Royal Bank o f Scotland, WestLB AG, and Westpac Banking Corporation. 5 1 I F C did not update safeguard policies during the C A O review o f these policies. PAGE I a - INDUSTRIES AND SUSTAINABLE DEVELOPMENTIFC EXPERIENCE EXTRACTIVE Operations Evaluation Group quired. Social issues are recognized to be crucial for mine closure, but not addressed in the requirements. IFC’s 2001 guidelines for offshore oilfields place much more emphasis on re- ducing gas flaring and other sources o f greenhouse gas emissions than the applicable 1998 WBG guidelines for onshore oilfields. IFC’s requirements for identifying and controlling i m - pacts o f downstream transportation o f o i l and gas projects are generally adequate, but may need to be more specific on road and rail transport o f oil, o i l products, and gas. There are also some areas, such as human rights, that are not covered by IFC’s guidelines, but are being ad- dressed by the industry or other bilateral or multilateral institutions.” 34. Leading E1 companies have signed up to “Voluntary Principles on Security and Hu- man Rights, ” but IFC has no such requirements. Human rights organizations have repeatedly noted violations o f the rights o f individuals in connection with E1projects, particularly in the oil E1 projects involve large investments, often in countries where security, includ- ing the threat o f war or terrorist attack, i s a concern. IFC has approved projects in several such countries, where sponsors were working with the army or private security forces to pro- tect their property. Since IFC usually leaves security issues up to client companies, there i s potential for problems to develop. A few IFC clients have been accused o f human rights vio- lations, and IFC has been criticized for supporting projects that could lead to such violations. Following an initiative led by several countries, many industry leaders and NGOs have signed up to “Voluntary Principles on Security and Human Rights.”s4However, IFC cur- rently has no policy or guidance on country-internal conflictsS5or potential human rights abuses, and does not usually specify how i t s client companies should protect staff and assets. Given the potential risks for people in the host country and for IFC’s own reputation, this ap- pears to be a significant gap and an area where corporate best practice i s not yet reflected in WBG standards and guidelines. 35. Policies, guidelines, best practice, and results in the Jield. Operational policies and guidelines provide direction to IFC staff and clients. But the ultimate test o f their usefulness is whether they improve results in the field. Safeguards are useful, but identification o f poten- tial problems by investment officers i s equally important so that these issues are not over- looked. Therefore, additional training o f investment staff to recognize social and environ- mental issues in E1projects throughout the project cycle would be useful. Investment officers need not have the expertise to replace environmental and social development specialists, but should have sufficient s k i l l s to recognize problems and the benefits o f getting specialists in- volved in internal and external project preparation at the earliest possible time. Particularly, investment staff intervention to bring specialists into early contact with sponsors and to en- courage sponsors to retain skilled and experienced social specialists in relevant situations is o f prime importance. Strong management support, and recognition o f investment officers who proactively engage with sponsors to address social and environmental issues, i s essential for improved sustainability o f IFC projects. 52 Interestingly, many o f these issues are covered in the “best practices” for o i l and gas compiled with input f r o m different stakeholder groups and hosted o n the W o r l d Bank’s web site. However, these “best practices” (www.worldbank.org/ogsimpact/) are unofficial and not even w e l l known within IFC. 53 www.hw.org/corporationsI 54 www.state.govlwwwlglobal/human rights1001220 fsdrl urinciples.html 55 n Disputed Areas” relates to dis- The W o r l d Bank’s Operational Policy 7.60 (OP 7.60, June 2001) “Projects i Jutes among countries, n o t within a country. EXTRACTIVE INDUSTRIESAND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE PAGE 19 Operations Evaluation Group 36. Problems can arise when IFC’s environmental and development specialists are not involved early enough. Several projects had problems that could have been prevented or more easily mitigated had there been early interaction between IFC’s social specialists and the project sponsor. For example, in one Latin American project, IFC became involved in the early 199Os, but the first social development specialist input from I F C came many years later, since I F C only hired social specialists starting in the mid-1990s. IFC’s specialist recom- mended that the sponsor employ more social specialists to adequately address community issues, including conflict resolution. But this recommendation was only taken seriously after the social and environmental impacts o f a subsequent spill became apparent. The sponsor n o w has a very proactive social department o f 15 people who consult with both rural and ur- ban stakeholders around the project. 37. Supervision for Elprojects is better than for the overall IFCporfolio, but gaps re- main. IFC’s supervision for E1projects was significantly better overall than for other sectors, with 82 percent (versus 59 percent) rated satisfactory. In part, this reflects the necessity o f closer supervision o f environmental and social aspects since many E1 projects face complex environmental and social issues. Nevertheless, there are important gaps: 0 I F C had insufficient information to assess the environmental Performance for several E1portfolio projects, often where I F C only had an equity investment or in older pro- jects preceding the introduction o f IFC’s 1998 procedure^.^^ 0 I F C was caught unaware because o f weak monitoring, or less than full disclosure by companies, o f problems relating to handling o f hazardous materials, mine closure plans, acid rock drainage, tailings impoundments, IFC’s resettlement policy, gas flar- ing, and transportation o f oil. 0 While project-level supervision overall was strong, IFC’s management and informa- tion systems do not provide adequate centralized data on environmental and social is- sues for the portfolio. For example, management i s only now starting to develop overview reporting templates specifying: which safeguard policies and guidelines ap- ply to specific projects and whether projects comply with them; which mining pro- jects have appropriate mine closure plans and funding in place; and which o i l and gas projects involve routine flaring. Some, but not all, o f these issues will be addressed through IFC’s new management information system. 38. Many o f IFC’s E1 projects are in countries with inadequate environmental and social governance; this strongly challenges I F C in terms o f resource allocation, reputation risk, and responsibility. Many host countries lack adequate environmental laws, regulations, and en- forcement. Previous O E G studiesS7 have found significantly worse performance in such coun- tries. E1projects are particularly concentrated there, and IFC’s potential added value i s thus also greatest. But this also requires substantial resources for I F C to ensure compliance. I t i s unclear whether WC will ever - or should - be in a position to replace host country en- forcement. In addition, even if I F C can ensure compliance while i t is an investor, it can typi- 56 No assessment o f the environmental effects o f eight projects was possible: in five, IFC n o longer had an invest- ment and had insufficient information before exiting; in one, the sponsor does not have the contractual obligation to report because IFC only has an equity investment; in two, projects had not begun commercial operations. Even for newer equity investments, IFC i s not always able t o contractually require compliance with its environmental policies and guidelines -but IFC’s review procedures do not distinguishbetween investment instruments. 57 For example, OEG’s Annual Review o f IFC’s Evaluation Findings: FY2001, in OEG Findings, April 2003 (http:/lwww.ifc.ordoe~/OEG~Findin~s~O42 103.pdf). PAGE20 EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE O p e r a t i o n s Evaluation Group cally not influence performance after exiting i t s inve~tment.~~ Also, some issues (e.g., new settlement in areas o f resource development) are difficult for I F C and i t s clients to deal with in the absence o f government support. Yet IFC does not consistently assess the institutional capacity o f national government agencies. In some cases there was a preceding or concurrent World Bank involvement to upgrade government capacity, but this i s not the This raises the question whether IFC ought to more routinely seek World Bank assistance to up- grade government's environmental review capacity where i t i s found lacking. A complemen- tary action that would reduce the burden on IFC would be to require that clients subscribe to international standards o f independent monitoring.60In all new category A projects (and for some category B projects), I F C requires independent audits or at least independent verifica- tion o f the Annual Monitoring Reports (AMRs). Such requirements could reduce the supervi- sion load and reputation risk for IFC, but this has to be balanced against the higher cost for the client -who also benefits from improved performance. 39. Baseline data is important, but was not always sufficiently established or tracked. EIAs prepared for category A projects are required to include a comprehensive baseline sur- vey o f environmental and social conditions. Yet for several past projects this had either not been completed, or did not provide enough information.61A detailed inventory o f the envi- ronmental and social conditions before breaking ground for exploration i s crucial to track development results, and i s also in the self-interest o f the company. Local communities - understandably - highlight areas where they want improvements, and do not necessarily give credit for past improvements achieved. It i s common for the E1 industry to be charged with claims o f polluting air and water, degrading land, destroying structures, and more gen- erally worsening livelihoods. While many claims are real, some cannot be substantiated.62 Extensive baseline data, later tracked in ongoing monitoring programs, would help distin- guish the two and allow establishing and appropriately compensating negative impacts. I t would also help the company - and I F C - to demonstrate positive development^.^^ O n the other hand, monitoring and baseline surveys are costly. I t i s therefore important to establish the most important environmental and socio-economic indicators in the EIA, and identify how they should be tracked later. I F C has recently started to track development results more systematically in its supervision, and well-designed EIAs and AMRs could help in this re- spect. 58 An exception i s one project where IFC had put in place funds for mine closure before exiting, and controlled their use even after the exit. IFC i s n o w handing over the responsibility to oversee use o f the funds to the local regulatory agency. 59 For example, W o r l d Bank sector adjustment loans in Ghana and Peru helped support capacity building for proper environmental governance in EI. But due to insufficient funds, it i s unclear whether the monitoring re- gimes will be sustainable. 6o For example, by securing I S 0 14001, BS8800 a n d o f N O S A ratings. For example, one IFC client did not complete a baseline study and thus experienced major difficulties when faced with claims o f pollution, and land and agriculture degradation; another client reportedly completed a base- line study but was subsequently unable t o locate it. 62 For example, villagers claimed a company h a d n o t compensated for the destruction o f a long-standing vil- lage, but photographic evidence showed the village did not exist before mining activities were announced; nu- merous claims o f stream and drinking water pollution could be disproved by evidence o f prior conditions. 63 IFC has been criticized by NGOs that it cannot demonstrate that E1projects reduce poverty and improve living standards. In the past, IFC has not consistently tracked changes in environmental, and particularly socio-economic indicators. OEG observed negative impacts in some projects it visited -but clear improvements in others. EXTRACTIVE lNDUSTRlES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE PAGE 21 Operations Evaluation Group Challenges in meeting IFC’s environmental and social development objectives 40. Funding mine closure - difficult to implement. Mine closure i s a major environ- mental and social issue for the sector. Abandoned mines represent an environmental hazard to the country, and potentially significant cumulative clean-up costs associated with long- term environmental and social damage. Since 1982, the WBG has therefore required concrete and detailed plans for reclamation and funding, with the goal o f returning land to conditions supporting prior land use (or better uses). Since 1998, IFC’s guidelines have required that money be reserved over the l i f e o f the mine to cover closure However, IFC’s experi- ence has shown in several cases that this approach can be problematic - when commodity prices declined, the ore body was less valuable than anticipated, and the mine l i f e thus shorter than anticipated. While IFC eventually secured funding for mine closure in several such cases, this clearly represented a risk, and mine closure issues have not been resolved for all portfolio Another difficulty for implementing sustainable solutions for mine closure i s that IFC generally exits from i t s investments when i t s role i s completed - often well before the mine closes - and therefore loses any influence over the mine operator. The WBG has developed good practice guidance, covering different options for securing funding that may offer but this guidance i s not mandatory. There i s clearly an urgent need to identify solutions (e.g., financial instruments) to ensure that mines will be closed properly, even if a company becomes insolvent. 41. Social issues related to mine closure - not covered and even more complex. The so- cial issues surrounding mine closure are not covered in IFC’s guidelines. They revolve around communities being able to deal with loss o f jobs, economic activity, revenues, and services, that are associated with mine closure. To address them successfully requires coop- eration o f multiple stakeholders, including local communities, mining companies, and differ- ent levels o f government. The WBG has developed guidance o n this issue, including the re- spective roles o f different stakeholders and “checklists” on handling social - and environmental - mine closure issues. A s with all guidance notes, these are not mandatory for IFC 42. Longer mine l$e - more potential for sustainable development? IFC has funded mines with estimated lives exceeding 30 years where the mining company becomes a part o f the community and can justify expenditures for improved infrastructure to support i t s opera- tions. This allows more time to contribute to sustainable development and prepare for mine closure, but may increase the community’s dependence. IFC also funds mines with relatively short lives. The compressed life can exaggerate some o f the social and environmental issues associated with mining, including mine closure and reclamation risk. One African company 64 While these guidelines apply in principle only t o coal, i r o n ore, and base metal projects, IFC has in practice also applied them to other mining projects. Reserving money i s not required in the general 1995 open pit and underground mining guidelines, another example illustrating the need t o update IFC’s guidelines. These are the guidelines relevant for precious metal mining, the largest share o f IFC’s mining portfolio. 65 For example, in one portfolio project i t was doubtful whether and h o w funding for mine closure could be secured, and in another IFC did not k n o w whether a mine h a d been closed in line with IFC requirements. Su- pervision documents do n o t consistently address whether mine closure plans and funding are in place. 66. In It‘s not over when it’s over: Mine closure around the world (2002), the mining policy group o f the W B G ’ s global product group has suggested several options for dealing with this problem, such as “closure bonds,” war- ranties, securities, and insurance. 67 Ibid. The publication recognizes that many aspects o f mine closure are beyond the private sector’s control, but recommends several steps that mining companies should undertake. 22 PAGE EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group told O E G that it wished it had invested in local community development earlier. They did not, in part because they had expected to close down within a decade, but will now continue to operate following the acquisition o f an adjacent mine. 43. Tailings Dams - the Achilles’ heel o f mining projects, but few problems in IFC’s portfolio. In 1996, Comsur, an IFC client, experienced a tailings dam break. In the same year, I F C also discovered through an evaluation that the client o f one i t s older investments was discharging tailings straight into a river - without a tailings dam.68Following this, a 1999 draft Policy on Safety of Dams (OP4.37) was prepared that includes tailings dams. The envi- ronmental assessment must now provide information on the tailings dam. IFC’s mining engi- neers and environmental staff are expected to review tailings dam safety at appraisal and dur- ing supervision. While there were no problems until recently, I F C just discovered a problem .~~ with a leaky tailings i m p ~ u n d m e n tTailings dams often remain following closure, posing a potential threat to the community. I t i s thus important to assess the public risks from potential tailings dam failure, starting from the EM. 44. Private ownership can improve environmental performance, but this often means ad- dressing the environmental legacy o f past practices - a challenge. Several I F C investments have been in newly privatized but existing operations. The past practices o f the former gov- ernment managers had left a legacy o f environmental problems (oil pits, leaking pipelines, contaminated waterways, leaking tailings dams), often passed on to the new owners charged with the cleanup. Environmental performance invariably improved under the new ownership, reversing most o f the negative impacts, but in some cases bringing the operation into compli- ance proved difficult and prolonged. 45. Going beyond the fence line. Current industry practice places an imaginary fence line around the project, with activities outside the fence line not considered part o f the project’s impact. While there has to be a cut-off, defining the fence line i s difficult. For example, a country’s ability or lack thereof to clean up a spill can have effects well beyond what may be considered the confines o f the project, particularly with respect to transport - by rail, road, pipelines, and sea. Transport i s often contracted to or i s the full responsibility o f third parties. Two I F C projects experienced high-profile hazardous materials spills, Minera Yanacocha, Peru, and Kumtor Gold, Kyrgyz Republic. Both featured road transport mishaps outside what had been defined as the fence line. From these experiences, I F C has extended i t s ap- praisal and supervision reach to cover some o f the operations o f suppliers and shippers, ap- plying environmental guidelines to these activities. Nevertheless, there will remain the debate over the point o f transfer o f responsibility. 46. Challenges when IFC enters late in the process. I F C can have a major influence if involved in the project from inception. In several cases, however, I F C had not been ap- proached until after the sponsors had advanced the project, not always in accordance with n such cases, I F C faces a IFC’s guidelines, particularly in relation to public consultation. I choice between tuming down a project and losing the opportunity to add value, or imposing what may be costly preconditions on the client for proceeding. Current guidance on what to do in such circumstances i s unclear. 47. F o r equity investments, ensuring sound environmental and social performance - or just obtaining sufficient information to judge it - is particularly dij=j?cult. I F C has several IFC asked the client to redress the problem, but the client chose to prepay IFC’s loan instead. 69 In another project, the reputation o f an IFC client suffered because o f a tailings dam break at an adjacent mine. EXTRACTIVE INDUSTRIES DEVELOPMENT AND SUSTAINABLE - IFC EXPERIENCE PAGE23 Operations Evaluation Group equity-only investments, with little legal leverage to influence the project and no legal right to obtain Annual Monitoring Reports. I F C could use “moral suasion,” but has not always done so in the past. In some cases, the appropriate environmental and social terms and condi- tions were in the loan documents, but these expired upon repayment o f the loan. In the event that the company i s delinquent in i t s environmental or social responsibilities, IFC will bear some reputational risk, whether i t remains an investor or exits. Even today, IFC does not al- ways include contractual environmental and social requirements for equity. OEG pointed this problem out in i t s first Annual Review in 1997. I F C management responded that i t would look into this issue, but that there were complex commercial and other considerations. But IFC’s 1998 environmental and social review procedures do not distinguish between invest- ment instruments and do not address this issue. It i s difficult to negotiate appropriate re- quirements for equity investments (e.g., shareholders’ agreement, put option in case o f envi- ronmental default, etc.), but lack thereof makes it difficult, if not impossible, for IFC to comply with i t s own procedures. Also, there are no guidelines establishing how active I F C should be as a shareholder, for example, whether I F C should routinely ask for information about a client’s environmental practices and raise this issue at shareholder meetings.” 48. Some new approvals may pose similar difJiculties. Since 2001, IFC has approved funding for five projects to help the E1sector with services, loans, or seed capital. These pro- jects could create jobs, establish new ventures, and improve services. As yet, there have been few disbursements under these projects, but when they, or similar projects are disbursed, they could present unique challenges for monitoring and enforcing compliance under IFC’s safe- guards policies and guidelines, because o f IFC’s indirect relation to the underlying projects and lack o f contractual leverage. Similar issues apply to E1projects approved through finan- cial markets operations, which were not covered in this evaluation. 49. Artisanal and small-scale mining (ASM) can give rise to major environmental and social problems, and sometimes pose a reputation risk for IFC’s clients. A S M features promi- nently in a number o f countries where I F C has E1 investments. Authorities sometimes consider this a stopgap measure for poverty prevention and leave A S M untouched, even if they oppose i t s practices. ASM i s often illegal, and takes place under very unhealthy and un- safe working conditions, including child labor. ASM can create major environmental dam- age, degrade land beyond rehabilitation, and pollute waterways with heavy sediment, heavy metals, hazardous materials (mercury), and acid rock drainage. Sometimes ASM precedes large mines, and government regulation often requires eviction o f miners; at other times, ASM i s attracted by large-scale mining activity. In either case, large mining companies face a dilemma - evicting ASM-operators i s difficult to do and results in poor community rela- tions, while letting them operate results in reputation risk -being blamed for the poor envi- ronmental and safety record o f ASM.’l In one case, an I F C client wanted to help artisanal miners with better equipment and guidance, but realized that even improved conditions would s t i l l constitute too great a reputation risk. Dealing with ASM has often proven beyond the capability o f industry. But governments are also struggling with it. Observers suggest a twofold solution. One, create alternative employment opportunities; two, help “upgrade” this sub-sector: provide assistance to transform artisanal miners into safer, small-scale miners that 70 For example, while IFC has strongly advocated the Business Casefor Sustainable Development, IFC’s guid- ance for nominees to corporate boards does n o t specify whether they are expected to promote the sustainability concept. 71 For example, A S M is a major issue in several mining projects in Africa. PAGE24 - INDUSTRIES AND SUSTAINABLE DEVELOPMENT IFC EXPERIENCE EXTRACTIVE Operations Evaluation Group are regulated and abide by improved environmental standards. Experience beyond IFC’s portfolio suggests that private companies can engage constructively with ASM-operators (Box 7), as does other WBG work.72 Box 7: Artisanal and small-scale mining - Constructive engagement by a private company Irrespective o f the legality o f their presence the significance o f small-scale mining activity on conces- sions (or potential incursions by small miners fi-om elsewhere) should not be underestimated, either by government authorities or private companies. In particular, where small-scale mining i s the main economic activity o f “established” communities, any external threats to their livelihoods will be strongly resisted. The “problem” o f small miners can only be addressed by looking beyond the threat they present to the project. This involves developing an understanding o f the reasons for their presence and the extent to which mining meets their basic needs (as a primary or supplemental economic activity), and identify- ing viable alternative livelihoods or opportunities to continue to mine. The emerging policy o f encouraging an intimate association between small and large-scale mining projects has merits, but should not be used as a substitute for a comprehensive government strategy towards small-scale mining. Source: Case study on the Las Cristinas Project (Venezuela) - Lessons from the Evaluation by Aidan Davy, Auristela Perez, May 1999. 72 See Volume I1 on what the World Bank has done and can do with respect to ASM; the collaborative group on ASM (http://wblnlO 18.worldbank.org/IFCEXT/casmite.nsf)in which the WBG participates; and the MMSD working paper on ASM (www.iied.ore/mmsd/activities/small-scale mining.html). EXTRACTIVE - IFC EXPERIENCE lNDUSTRlES AND SUSTAINABLE DEVELOPMENT Operations Evaluation Group PAGE 25 5. Disclosure and Consultation 50. IFC’s disclosure requirements have increased. I F C adopted its first disclosure policy in July 1994 and revised i t in 1996 and 1998.73Under the policy, I F C balances accountability as a public institution - favoring disclosure - with the need to protect commercially sensi- tive information. E1projects are particularly sensitive, and IFC frequently signs confidential- ity agreements. Disclosure in I F C has increased substantially since the early 1990s, when al- most none was required. Recognizing the fundamental importance o f accountability and transparency in the development process, I F C requires disclosure of: 0 Summary of Project Information - a brief factual summary o f the evolving project. 0 Environment-RelatedDocuments - Category A projects: Environmental Impact As- sessment, released at least 60 days before the Board date; Category B projects: Sum- mary o f the key findings o f the environmental review, released at least 30 days before. 5 1. Disclosure is only required pre-approval; public information is thus often outdated, but this aspect has improved recently. In several projects reviewed by OEG, project scope or design had substantially changed, but the publicly available information had not been up- dated.74Publicly available project documents usually addressed planned measures to address environmental effects, not whether these measures have been effectively implemented. Such issues would usually be covered in an Annual Monitoring Report (AMR) supplied by the cli- ent to IFC, but AMRs are not publicly a~ailable.’~ While disclosure has to be balanced against commercial confidentiality, lack o f disclosure diminishes trust.76 For some recent IFC projects, updated environmental and social information has been d i s ~ l o s e d . ~ ~ 52. IFC protects its clients by keeping project information confidential - but is that in their best interest? Leading industry players see value in disclosure. IFC, at EIR workshops and other consultations, has been criticized - sometimes based on misconceptions about specific E1projects, More information could diminish such misconceptions, but I F C does not disclose, even in aggregate form, non-compliance by its clients.78There are no guidelines on whether, or under what circumstances, I F C should notify local authorities or the public o f known compliance shortfalls. M a n y I F C clients have started to voluntarily disclose detailed social, environmental, and financial reports, recognizing that openness and transparency in- creases trust and i s in their long-term interest. Others are considering it, such as one client who asked OEG’s advice about best practice in sustainability reporting. Leading industry 73 F o r IFC’s current disclosure policy see www.ifc.oralenvirolenvirolDisclosure Policv/disclosure.ht. 74 IFC’s disclosure policy i s ambiguous: i t requires that the summary o f project information and environmental review summary be updated when there are material changes, but does n o t specify whether this also applies after Board approval. In practice, IFC did n o t always update these documents where later changes occurred. 75 In i t s current form, the AMR i s highly technical, sometimes running into hundreds o f pages, and w o u l d not necessarily lend itself for publication. A less technical summary o f k e y indicators o f environmental, social, health , and safety performance (standardized t o the extent possible) may b e preferable. 76 Trust and validity can be increased when the community participates i n the monitoring activities, in the de- sign o f the baseline data collection, gets trained in sampling and analytical techniques, and participates in the recording and archiving o f the data. Such measures could proactively increase trust, o r may be necessary once t r u s t i s lost. 77 Examples include an updated environmental action plan for L a Colorada (Mexico) and an updated environ- mental management p l a n for Konkola Copper M i n e (Zambia). 78 This i s true not only for EI, but for IFC’s entire portfolio. PAGE26 EXTRACTIVE lNDUSTRlESAND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group players publish independently verified, detailed sustainability reports, including, for example, sites with independent audits and mine closure plans; injury rates; land, water, and energy use; spill incidents, gas flaring, carbon dioxide, and greenhouse gas emissions; and environ- mental and non-compliance incidents. IFC has begun to insist on disclosure o f ongoing envi- ronmental and social information in a few high-profile projects, but this i s not the norm. 53. I n several cases, IFC clients have gone beyond the disclosure requirements.” One client is now the only company in the country that audits and discloses environmental per- formance reports. In a few recent cases, I F C has agreed with the client on independent moni- toring and disclosure o f the AMR. There are also several cases where I F C has gone beyond the minimum requirements, one example being the Chad-Cameroon pipeline project with a 19-volume environmental management plan and ongoing independent review. Some other I F C clients also disclose substantial amounts o f information about their environmental and social activities.80 Such information can be found, for example, on IFC’s or the clients’ web sites. 54. The trust of the community can be built through open, honest, respectful, and ongoing consultation. But IFC’s requirements fall short o f i t s own “good practice” guidance on public consultation and disclosure plans.81The guidance defines consultation as “a wider continuous process o f participation o f all stakeholders in the decisions throughout the formulation and execution o f a project.” IFC’s pre-approval disclosure and consultation requirements may not be enough to achieve trust in the community. In particular, ongoing consultations are not re- quired (unless a project involves resettlement or indigenous people),82nor i s disclosure. 55. Good communication can improve the effectiveness o f assistance programs and re- duce anxiety ifproblems occur. Unilateral company decisions on what i s best for the com- munity are likely to be misguided, expensive, and cause discontent. For example, when a mining company supplied - as a temporary solution - tanks to restore water supply to vil- lagers without consulting them, they accused i t o f treating them “like refugees.” But another mining company consulted extensively with the community and developed - for a few hun- dred dollars - a project that recycles engine o i l for coastal fishermen, reduces coastal pollu- tion, and has strong support in the community. Companies that communicate poorly can face high costs from project interruptions and for mending community relations.83From field vis- its, desk reviews, and the literature, it i s clear that I F C clients that consult, disclose, and communicate well are better o f f than those that do it poorly. 79 For example, K u m t o r in the K y r g y z Republic www.cameco.comiouerationsl~oldikumtor/index.phu or MBR, a Brazilian company: www.mbr.com.br/eng/meioambiente/meioambiente.asp. 8o Disclosure o f financial information, including revenues generated for governments, i s covered in the next section. 8 1 Available either f r o m the WBG bookstore or online at www.ifc.org/envirolPublications/Practice/practice. htm. 82 F o r category A projects, IFC’s 1998 procedures require that “The project sponsor continues to consult with relevant stakeholders throughout project construction and operation, as necessarv, t o address environmental assessment related and other issues that affect them. IFC requires the project sponsor t o report o n ongoing con- sultation as part o f i t s annual reporting requirements” (emphasis added). 83 F o r example, one IFC client did n o t effectively consult the community and k e y players at the outset. An acci- dent with hazardous material spill soured community relations, cost the company millions o f dollars and created major and costly p r o b l e m ; it m a y result in preventing them from developing a n important deposit o n the con- cession. The company started an active social assistance program, but it came late. EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE PAGE 27 Operations Evaluation Group 56. Public consultation can be complex, confusing, and difJicult for both the company and the stakeholders. Some multinationals have geared up for this important part o f doing business, but others are struggling, and even with the best o f intentions are finding them- selves running into difficulties. Some have requested assistance from IFCg4 To usefully con- sult with the companies on an equal footing, the communities and other stakeholders may need assistance and training to understand the business and technology. Independent experts can help, but who pays for them? If the sponsor provides the funding, the expert may be per- ceived as compromised, but alternative funding sources are scarce. IFC has worked with a number o f clients and the communities to facilitate the consultative process, sometimes using trust funds (Annex 3), sometimes with the help o f the CAO - and OEG has witnessed posi- tive effects in several projects. 84 IFC has prepared a checklist for improved public consultation “Doing Better Business through Effective Pub- lish Consultation and Disclosure: A Check Sheet” (Annex 6). PAGE28 EXTRACTIVE lNDUSTRlES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group 6. Governance and Challenges o f Managing Revenues from Extractive Industries 57. Extractive industries - large revenues for countries with poor governance. The eco- nomic sustainability section o f this report indicated that most o f IFC’s E1investments created large revenues for host countries, particularly in o i l and gas, sometimes even when investors did not achieve satisfactory r e t ~ m s There . ~ ~ i s abundant evidence that such large revenues, which, in addition, tend to be volatile and finite, create particular challenges for resource-rich countries. While I F C usually thoroughly analyzed the financial, social, and environmental aspects o f a project, i t has, in the past, not approached revenue management and distribution with the same rigor. Since IFC’s E1 projects are highly concentrated in risky countries that tend to suffer more from weak governance, the issue becomes particularly important. Since fiscal year 1993, h a l f o f IFC’s E1 approvals were in countries in the worst governance quartile, compared to only a quarter o f all non-E1 approvals.86T o recommend not investing in countries with poor governance sounds tempting; but the WBG’s mission i s to reduce pov- erty and improve people’s lives - and hundreds o f millions o f people live in resource-rich countries with poor govemance. W h i l e the WBG alone may not be able to improve govemance, using i t s unique position as global player with the convening power to engage both public and private stakeholders, i t can effect change. 58. Challenges o f investing in countries with the poorest governance. Countries with poor govemance often lack transparency, adequate laws, financial capacity, and regulations to al- l o w regulators and judiciary systems to cope adequately with large E1projects. If corruption i s an issue, customs agents, transport companies, regulators, and government officials could exert significant pressure o n projects, causing delays and additional costs. From a develop- ment perspective, corruption i s bad for growth, and tends to reduce economic growth and private sector in~estment.~’ Resource-rich developing countries that are often cited among the best examples for the positive contribution o f the E1sector - such as Botswana and Chile - are all considered to have relatively little corruption.88 This i s particularly the case where governments get revenues based o n production o r revenue (e.g., royalties), n o t o n profitability. In addition, in several projects, notably in Europe & Central Asia and Africa, the govern- ment retroactively changed fiscal rules or contractual arrangements. 86 OEG used the 2001 “Govemance Research Indicators Country Snapshot” (GRICS) published by the W o r l d B a n k Institute. I t measures perceptions o f a large number o f respondents and, as with any such indicator, indi- vidual country rankings are subject t o large margins o f error. Countries were sorted using a composite o f the average ratings for voice and accountability, political stability, government effectiveness, regulatory quality, rule o f law, and control o f corruption, and then divided into quartiles. Results are similar using Transparency International’s 2002 Corruption Perceptions Index. However, IFC staff attested that IFC h a d n o t invested in several projects due to country governance concerns. 87. F o r example: IMF Economic Issue 6: why worry about corruption. (Paolo Mauro, 1997). Also: IMF Eco- nomic Issue 12: Roads to nowhere: How corruption in public investment hurts growth (Vito Tanzi, H a m i d Davoodi, 1998). Transparency International ranks them in the top thud o n corruption, ahead o f several industrialized coun- tries. EXTRACTIVE - INDUSTRIES AND SUSTAINABLE DEVELOPMENT IFC EXPERIENCE PAGE29 O p e r a t i o n s E v a l u a t i o n Group 59. Results - for development, IFC’s bottom line and the environment Figure 3: Better Development Results were closely correlated with govern- with Better Governance ance quality. OEG analyzed the results -””’” I 0 Poor governance o f the 45 studied projects by different Goodgovernance governance indicator^.^^ Development results were significantly better in countries with good government effec- tiveness, political stability, and regula- tory quality (Figure 3). I t i s also worth noting that investing in countries with poor governance i s not necessarily financially attractive for IFC. In fact, Government Political Stability . Quality Repulatory . . . none o f IFC’s 10 most successful E I - Effectiveness Source: WBI Grics-I1 investments was in a country with the highest corruption.90 IFC’s equity re- Figure 4: Better Country Governance - Better IFC ~~ tums were worst in countries with the poorest control o f corruption and vice Equity Returns for E1and for Other Sectors versa (Figure 4).91 Environmental re- - Govcmancc quanlks: sults were significantly better with bet- wont Best ter political stability. 60. Bribes are common in E1 par- I n ticularly in oil and gas. According to Transparency IntemationalYg2the o i l and gas sector i s perceived as third 0 El equity retums most likely to involve bribes, follow- Non-EI equity retums ing only public works contracts and arms deals. Mining ranks seventh. The 2 IO 32 431 40 5 7 9 Number o f projects 3 43 OECD Convention on Combating World Bank Institute: Govemance ResearchIndicators Country Snapshot (GRICS) Bribery o f Foreign Public Officials in Dataset, 2001 * 175 countries were sorted based on the average o f their respective GRICS International Business T r a n s a c t i o n ~ ~ ~ indicators (Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule o f Law and Control o f Corruption) and entered into force in February 1999. divided into auartiles. Thirty-five countries have ratified the convention, and most have already enacted legislation to make it a crime for businesses to bribe foreign public officials. Quite a few countries already had laws outlawing corruption abroad before that.94Nevertheless, paying bribes s t i l l appears to be common. 89 “Good” control o f corruption, government effectiveness, voice and accountability, political stability, and rule o f l a w was defined as the top h a l f o f the W o r l d Bank Institute’s “GRICS-11” data. Too few (four o f 45 studied projects) o f IFC’s E1investments were in countries with good control o f corruption t o conduct meaningful sta- tistical analysis. Ranking in terms o f “successful” was based o n returns (in N P V terms). “Highest corruption” countries were those in the bottom quartile o f Transparency International’s 2002 Corruption Perception Index, ” Rankings for control o f corruption by quartile o f the W o r l d B a n k Institute’s “GRICS-11” data. 92 Bribery in business sectors: www.transparencv.org/cpi/2002/bpi2002.en.html#sectors. 93 See www.oecd.org/ and the section o n corruption. 94 F o r example, the United States with the Foreign Corrupt Practices A c t o f 1977. PAGE30 EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT IFC EXPERIENCE - Operations Evaluation Group 61, IFC takesprecautions against corruption, but it is clearly a risk. IFC projects provide a demonstration effect for others and i t is therefore imperative that the projects are imple- mented transparently and honestly. IFC usually explicitly requires sponsors to abide by host country laws and regulations, which often outlaw corruption. During appraisal, IFC typically checks the background and reputation o f i t s sponsors and how licenses were awarded. To that end, I F C has, on several occasions, hired private investigators. I F C also typically requires that its clients’ financial statements be audited, which may reduce but not eliminate the scope for irregularities. OEG reviewed project files and had informal discussions with I F C staff, project sponsors, and third parties knowledgeable about the sector. O E G found no evidence that IFC clients were paying bribes, but did not conduct an audit. However, particularly since I F C projects are taking place in countries with high perceived levels o f corruption, there i s clearly a risk. OEG’s field visits and other research showed substantial differences with re- spect to the transparency and handling o f E1 sector revenues among different countries with I F C E1investments. 62. Corruption is linked to revenue management, but is dfficult to prove. IMF research has found that corruption distorts allocation o f resources by governments. It i s associated with higher public spending, but with poorer quality infrastructure. In countries with poor governance, i t i s therefore particularly important to address how governments manage fiscal revenues from EI. OEG visited several countries where little o f the government revenues was flowing back to benefit communities next to E1 projects. In some countries, there was a strong suspicion that government officials at different levels were corrupt. Without transpar- ency about the resource flows, such allegations are difficult to prove or disprove. About sev- enty percent o f government officials surveyed (Annex 4B) saw a need for the IFC to help improve governance and transparency (the corresponding figure for the World Bank i s 83%). One mining minister whom I F C interviewed advocated disclosure o f moneys provided to lo- cal authorities to better ensure local communities benefit from it. 63. IFC’s recent efforts with respect to revenue management. The Chad-Cameroon pipe- line i s the first I F C project to proactively tackle revenue management.95This followed IFC’s recognition that projects which devolve little or no benefit to local communities present both development and commercial risks. A recent I F C position paper on Revenue Distribution and Management96(Box 8) states that, in high-impact projects in countries with poor governance and weak institutions, I F C will systematically assess the risks that governments would mis- use payments or that intended benefits may not reach local communities. I F C would also, together with the Bank, IMF, and sponsors, consider mitigating measures. At this point, the position paper applies only to “high-impact” projects (substantial in relation to the nation’s income) and none o f the mitigating measures are mandatory. 64. Key issues in revenue management: A joint working group consisting o f industry, civil society and WBG staff considered the following policies critical with respect to revenue (i) management and ~ t i l i z a t i o n : ~ ’ the establishment o f transparency and accountability with respect to revenues earned and their disposition; (ii) consultation with principal stakeholders in developing plans for the use o f resource revenues; ( iii) credible oversight and audit o f the 95 For more details see www.worldbank.org/afcc?xoi. 96 Revenue distribution and management in IFC projects: www,ifc.org/test/sustainability/docs/Revenue Distri Mgmt.Ddf). 97 See http://www,ifc.org/ogmc/socialandeconomicimpact.htm EXTRACTIVE - lNDUSTRlES AND SUSTAINABLE DEVELOPMENTIFC EXPERIENCE PAGE 31 Operations Evaluation Group implementation of these plans; and (iv) serious attention to building local institutional capac- ity. 65. Disclosure of government revenues - a step t o w a r d better management? To date, neither the IMF nor the World Bank necessarily require that resource-rich countries disclose the revenues generated by EI, even though they sometimes recommend it. IFC’s E1 clients are also not required to disclose the revenues they generate for governments. However, sev- eral public campaigns have started to advocate disclosure o f EI-revenue~.~’ But disclosure o f government revenues can raise difficult issues. Governments in some countries even make i t illegal, for example through confidentiality covenants in production sharing agreements. In- dustry is concerned that unilateral disclosure could create a competitive disadvantage. H o w - ever, almost all industry representatives that OEG interviewed in the course o f this study would support industry-wide disclosure o f government revenues. Most o f them, however, emphasized that these were their personal, not necessarily corporate views. Some companies operating in the E1 sector have started disclosing government revenues even against host government concerns. Box 8: IFC’s position regarding revenue distribution and management- highlights Revenue distribution and management in extractive industry projects are important development is- sues and have emerged as major factors for reputational as well as operational risks for investors. Large revenues generated by these projects and accruing to government may be misused. Benefits from these revenues may n o t reach local communities. While revenue distribution and management are not issues in every IFC project, they can become problematic in high-impact projects, that is, where revenues are substantial in relation to the nation SJiscal income. To deal with the problem, IFC proposes a number o f steps that it may undertake for high-impact pro- jects that will generate substantial revenues for host governments: Engage with the W o r l d Bank or IMF to seek coordination o f issues beyond IFC’s mandate. 0 Where coordination may not achieve the necessary level o f management, consider other mitiga- tion measures, such as sponsor’s community development programs. 0 Seek funds or partners to assist a Sponsor with capacity-building. 98 The “extractive industries transparency initiative” (www.dfid:aov.uWNews/News/files/eiti auide.htm) and “publish what you pay” (www.wblishwhatvoupav.org/) advocate disclosure. PAGE 32 EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group 7. Issues Beyond the Control o f IFC and Its Clients - Require Effective Cooperation and Action Inside and Outside the WBG 66. Issues beyond IFC ’s control require better cooperation among Jinanciers and devel- opmentpartners. IFC has been more effective in E1projects than in other sectors in address- ing most issues within i t s own control. More needs to be done to ensure that the sector and the projects IFC supports contribute to sustainable development. IFC can address some issues together with i t s clients; for example, helping them to improve their environmental perform- ance, their community development activities, and consultation and disclosure - to serve as role models for sustainable development. IFC has done muchg9and can probably do even more to convince i t s clients that better environmental and social performance, while poten- tially entailing short-term costs, will ultimately be in their long-term interest. But to have even greater impact, IFC also needs to work o n further improving its o w n environmental and social policies and guidelines and their implementation and - together with i t s member countries - help improve those o f other international financial institutions. Little would be gained if IFC alone adds requirements and i t s potential clients seek financing elsewhere. But many o f the issues discussed in this evaluation are even beyond the control o f IFC’s client companies. To resolve them will require close cooperation within the World Bank Group and with other stakeholders and partners - the IMF, IFC’s member governments, and other in- ternational financial institutions. O n environmental and social issues, the recent adoption o f IFC’s policies and guidelines by several internationally active banks i s an important step in that direction. 67. Merging World Bank and IFC units has improved sectoral cooperation; but coopera- tion with country departments and tackling o f revenue distribution and utilization, govem- ance, and transparency i s s t i l l inadequate. To validate the findings o f this evaluation, w e sur- veyed all o f IFC’s sectoral investment staff and regional economists.”” Almost 90 percent responded that merging IFC’s and the World Bank’s sector departments into one Global Product Group had improved coordination o f sectoral issues. At the same time, less than h a l f said that overall cooperation within the WBG was adequate; in their view, lack o f support by the W o r l d Bank’s country departments was the biggest internal constraint.’” One likely ex- planation for the insufficient coordination i s that the country directors lack the incentive to address E1 issues: In the countries where IFC operates, the WBG’s E1 lending volume tends to be small, E1projects are considered environmentally risky,’02 and governments may not be 99 See, for example, IFC’s publication, The Business Casefor Sustainability (www.ifc.org/testlsustainabilitv/docs/TheBusinessCase.pdf) and its 2002 Sustainability Review (h~://www.ifc.or~/ar2002/review/sustainability,ht~). See also the work o f the Natural Resources Cluster of Business Partners for Development (www.bDd-natura1resources.org). loo Over 90% o f 33 staff responded. We did not survey managers and directors, but interviewed them individu- ally. lo’ Fifty-two percent of IFC respondents saw ths as a problem. Their comments included: “The big issue i s that the WB country departments rarely give adequate priority to mining issues.’’ “ I F C N B coordination hap- pens only on an individual basis at staff level and on the director level, but the former i s not very consistent.” lo2 Eighty-eightpercent of 34 WBG respondents stated that the WBG avoided good E1projects due to safe- guard concerns. This confirms the 2001 Fourth Quality-At-Entry Assessment by the WBG’s Quality Assurance Group, which found that risk aversion resulted in dropping environmental components of projects. An anony- mous World Bank survey respondent put it bluntly “The World Bank Management i s extremely sensitive to developed country social andenvirokental NGOs.” EXTRACTIVE - IFC EXPERIENCE lNDUSTRlES AND SUSTAINABLE DEVELOPMENT PAGE33 Operations Evaluation Group receptive to WBG activity in this area. I F C staff considered lacking support by host country govemments to be the biggest constraint to enhancing the contribution o f E1 sector to sus- tainable development - 63 percent of 24 I F C respondents considered this a constraint (See paragraph 69). Only about h a l f o f the I F C respondents said that revenue distribution and utilization, governance, and transparency were adequately addressed in E1 operations. This confirmed an analysis o f CASs, showing that weak country governance and revenue man- agement in resource-rich countries were often not adequately addressed in CASs and subse- quent WBG interventions; IFC’s E1 activities were often not even mentioned in CASs (see Volume 11). This points to a need to more thoroughly address E1 issues in country strategies, ideally in a Comprehensive Development Framework mode, also engaging other stake- holders beyond the WBG. 68. Perceptions of environmental and social performance differ. Well over 90 percent o f I F C staff responded that environmental and social issues were adequately addressed in IFC’s E1 projects. This perception i s better than our evaluation results suggest, but staff may have provided their perception on what IFC’s performance is for projects approved today, whereas we evaluated past results. Certainly the perception o f I F C staff i s higher than that o f outside observers. Among the participants at the EIR workshops, only 44 percent (of 52) responded that I F C successfully addressed environmental impacts, 33 percent (of 48) responded posi- tively for social impacts. Views among NGOs were worst - 15 percent and 7 percent posi- tive, respectively. Responses from govemment and industry were around 50 percent positive, again slightly better for environmental issues. This points to a need to improve performance compared to past results, but also for much greater disclosure and engagement o f stake- holders to address the poor perceptions where they are not warranted. 69. Even a concerted WBG effort i s probably not enough; I F C staff respond that the big- gest factor keeping E1 from contributing to sustainable development i s lacking support from the host country government. About two-thirds o f respondents cited this factor as a con- straint. One respondent explained “[The] main problem i s governments in client countries don’t want the Bank or I F C messing with their only independent source o f revenues. Even when the Bank does intervene, i t often does not have the leverage to engineer change.” Some respondents commented that the IMF also needs to be involved, but also that continued en- gagement in the sector was important to maintain the country dialogue. An OED study also found that governance was key to a successful management o f fiscal revenues from EI, but that government commitment or political will to address i t was lacking in four out o f five country cases (Volume 1 1, chapter 5). 70. The results confirm that closer cooperation is needed - within the RBG and beyond. The survey results confirm the evaluation findings - that important issues such as revenue distribution, utilization, governance, and transparency, need to be better addressed. This will require closer cooperation within the WBG. But the WBG will also need to use i t s convening power and the help from its member governments, the IMF, industry, financiers, and civil society to break the resource curse and ensure that extractive industries contribute to sustain- able development. Greater transparency about the resources generated for governments i s likely to increase pressure on governments to account for their flow and effective use. Our evaluation results suggest that better country governance i s not only likely to improve the development results o f IFC’s operations, but also IFC’s own financial results. 7 1. IFC needs to better tackle transparency, government revenue distribution, and more generally, sustainable development. Other stakeholders echoed the perceptions o f I F C staff. PAGE34 INDUSTRIES EXTRACTIVE AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group NGOs, industry, and governments alike expressed a need for I F C to address these issues (Annex 4B). But neither group responded that there was enough I F C effort or success. NGOs were most critical (under 10 percent said I F C successfully addressed these areas), but the perceptions o f industry (about 20 percent) and government (about 40 percent) also indicate substantial room for improvement. EXTRACTIVE - INDUSTRIES AND SUSTAINABLE DEVELOPMENT IFC EXPERIENCE PAGE35 Operations E v a l u a t i o n Group 8. Conclusions and Recommendations 72. Overall, IFC has effectively supported E1 operations, but needs to further improve their implementation, better address broader sustainability issues and, with i t s clients, better track and report on results achieved. Projects usually generated large revenues for govem- ments and opportunities for people. IFC has generally added value, particularly in improving the environmental and social aspects o f projects, but given the sector’s high impact potential IFC will need to help client companies to prevent or mitigate negative impacts better and more systematically. IFC also needs to ensure that i t s environmental and social guidelines and procedures continue to set standards and adapt in line with rapidly improving industry standards, and that i t s projects adapt with them. In pursuit o f i t s sustainability agenda, IFC needs to do more to address the risks that government revenues may not be effectively used for development, that benefits may not be distributed transparently and that local communi- ties may not tangibly benefit from E1projects. T o enhance the contribution o f IFC’s projects and the sector to sustainable development requires further improvements in project imple- mentation, effective cooperation within the World Bank Group, and the full engagement o f all stakeholders. 73. This evaluation found gaps in three areas: strategic gaps, resulting from not ade- quately addressing issues such as country governance and revenue management through ef- fective action, jointly within the WBG and with other partners, and clearer project selection criteria; implementation gaps, which if addressed could enhance the performance o f IFC’s E1 projects and through the demonstration effects o f IFC’s projects and requirements, that o f E1 more generally; and gaps in engaging stakeholders, which if addressed would allow IFC and its clients to improve performance and better demonstrate contribution to sustainable devel- opment. PAGE 36 INDUSTRIES AND SUSTAINABLE DEVELOPMENT EXTRACTIVE - 1% EXPERIENCE Operations Evaluation Group Recommendation 1 Formulate an integrated strategy Recommendation Address extractive industries in CASs. I F C should work closely with 1a: other parts o f the WBG to ensure that CASs for resource-rich coun- Paragraphs I I, 25, triesIo3 explicitly discuss the E1 sector’s contribution to sustainable 66- 70 development (e.g., importance o f fiscal revenues, their management, distribution, and use for development priorities) and obstacles for en- hancing i t s contribution. The CAS should provide an agreed frame- work for WBG-wide cooperation, with a particular focus on close in- teraction between I F C and the World Bank’s country departments. I F C and the World Bank should routinely work together to enhance the development impacts o f E1 projects, for example in the form o f public-private partnerships with respect to community development programs.Io4I F C and the WBG should build on existing initiatives, such as Business Partners for Development and the Comprehensive Development Framework, to enlist the help o f other stakeholders, such as the IMF, other bilateral and multilateral institutions, industry, and civil society. I O 3 This recommendation also applies to countries expected t o become resource-rich, for example through a large IFC-supported project, and where IFC intends to make investments more generally. IO4 One form o f public-private partnerships, as recommended in the WBG’s Private Sector Development Strat- egy (2002) i s “output-based aid” (OBA). OBA would use public funding, at least in part, but feature private provision o f services. Some taxation schemes allowing tax credits for community development expenditures are similar t o OBA. EXTRACTIVE - IFC EXPERIENCE INDUSTRIES AND SUSTAINABLE DEVELOPMENT PAGE37 O p e r a t i o n s Evaluation Group Recommendation Where country govemance i s weak, increase transparency and address lb: the weaknesses. Together with the World Bank and other stake- Paragraphs 12, 14, holders, IFC should analyze all aspects o f country govemance quality 25, 57-65, 71; and the risks that poor govemance may detract from sustainable de- Box 8 velopment. In particular, IFC should encourage enhanced transpar- ency and disclosure concerning contractual agreements between in- vestors and governments, the amount o f fiscal revenues generated and their distribution.Io5IFC - together with the World Bank and other stakeholders - should encourage such transparency sector-wide in the country. When financing projects whose major expected devel- opment contribution i s the generation o f revenues to governments, I F C should carefully review and discuss the govemance risk that these revenues will not be used productively. Where such govemance risk i s high, and the project’s revenues are significant,’06 IFC should work with the government (in partnership with the World Bank and IMF) to put in place mechanisms to reduce this risk, including possi- bly ring-fencing o f project revenue management. For all proposed E1 investments, IFC should address these issues in Board Reports. Recommendation Support environmental and social sustainability. I F C should focus on 1c: projects that can serve as models for environmental and social per- Paragraphs 12, 34, formance, transparency, and disclosure. Where laws and regulations 38; - or their enforcement - are weak, I F C should insist on special Box 3 measures to ensure a project’s sound environmental and social per- formance. Such measures could include building local monitoring ca- pacity, and disclosure o f independently audited and publicly disclosed monitoring reports. They could also include an explicit assessment o f the risk o f conflicts, and measures to deal with them. lo5 F o r example, IFC should encourage disclosure o f production sharing agreements, concession, and privatiza- tion terms, as w e l l as payments made t o governments at different levels. Given that providing this information is even illegal in some countries and investors m a y have justified concerns about unilateral disclosure, the WBG should encourage country- or industry-wide disclosure. lo6 “Significant” - should be considered in both absolute terms and in relation t o total sector production, based o n analysis o f past experience, and may vary by country. PAGE38 INDUSTRIES EXTRACTIVE DEVELOPMENT AND SUSTAINABLE - IFC EXPERIENCE Operations Evaluation Group Recommendation2 Focus on implementation Recommendation Improve proi ect and supervision.’08 IFC should continue to 2a: require high-quality environmental impact assessments that establish Paragraphs 11, 16, baseline data for relevant environmental and socio-economic impact 27, 36-39, 47, 68, indicators. These indicators - compared to the baseline - should be 72; consistently trackedlOg and aggregated for IFC’s management. Appro- Box 3 priate requirements to allow IFC to adequately mitigate risks and monitor all i t s projects should be included for all investments, particu- larly equity.’” Where IFC finds poor environmental and social sys- tems or performance, i t should address them proactively and vigor- ously. ’’’ IFC’s investment officers and nominees to company boards should be co-responsible with technical specialists for the environ- mental and social performance o f their projects. Where possible, IFC should also develop and use local monitoring capacity. Recommendation Adequately involve specialists throughout. IFC needs to ensure that 2b: i t s environmental and social specialists are consulted as early as pos- Paragraphs 27, 35- sible and throughout the project life, and that investment officers fully 3 6; share relevant information. To that end, investment officers need to be Box 3 better trained to identify risks and opportunities. Also, changing the incentive structure by making the investment officer and department explicitly accountable for environmental performance would likely provide better incentives for calling in the experts as early as possible, not after a problem has materialized. Recommendation Enhance reporting o f results. IFC should develop a reporting template 2c: that specifies for each portfolio project which safeguard policies and Paragraphs 11, 2 7, guidelines apply, whether the company i s in compliance with them, 37, 39; and how i t performs with respect to key sustainability indicators for Box 3 the industry. Where relevant, IFC should also include “beyond the fence line” issues, such as transportation and project-related security issues. 107 IFC should continue t o appraise projects by comparing their global competitiveness and review in-depth geological and metallurgical characteristics. IFC should also diligently check the background o f sponsors and h o w concessions were awarded. 108 Current supervision o f E1projects i s significantly better than average and these recommendations build o n this strength. This requirement should apply t o a l l portfolio companies. F o r example, IFC should routinely ask clients for Annual Monitoring Reports even where they are n o t required. 110. The requirements should encompass environmental and social risks, as w e l l as financial risks (e.g., from hedging) and parallel what IFC normally addresses in i t s loan covenants. ‘I1 IFC should encourage i t s clients to improve their practices in line with evolving good industry practices. Where clients do n o t correct important shortfalls, IFC should call the loan, raise the issue at shareholders’ meet- ings, or i n f o r m the local regulatory agency, o r the press. IFC should consider developing guidelines o n h o w “active” it should be as a shareholder. EXTRACTIVE INDUSTRIESAND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE PAGE 39 Operations Evaluation Group Recommendation Evaluate distribution o f benefits. IFC should develop’12 global com- 2d: parators for the distribution o f benefits from E1 - among investors, Paragraphs 7, 10, governments at different levels, and local communities. For i t s pro- 14, 57, 63, 67, 70; jects, IFC should analyze the distribution and compare it to other E1 Box 8 projects. At appraisal, IFC should include the distribution effects in i t s sensitivity and risk analysis (e.g., distribution o f benefits at different levels o f output and prices), track actual distribution during the pro- ject life, and aggregate the data at the country and sector level. Recommendation3 Engage the stakeholders Recommendation Update policies and guidelines. In consultation with stakeholders, IFC 3 a: should continuously update i t s environmental and social safeguard Paragraphs 23, 25, policies, guidelines, and processes in line with evolving good practice 33, 34 ; in the indu~try.”~ The WBG should use i t s convening power and the Box 2; help o f i t s member governments to promote their use by governments, Figure 3 industry, and other financiers. IFC should develop, update, or clarify policies and guidelines on indigenous people (or “vulnerable peo- ple”), safety o f dams, natural habitats (or biodiversity), security and human rights, HIV/AIDS prevention, mining (closure - funding and social issues, acid rock drainage, precious metal mining), and o i l and gas (gas flaring, downstream transportation o f oil). ‘12 Together with the W o r l d B a n k and other stakeholders. ‘I3 The policies and guidelines need t o b e comprehensive enough t o capture a l l important environmental and social effects, local, regional, and global, as w e l l as short- and long-term. Yet, they also need to b e practical and reflect IFC’s industry experience: they need t o be realistic (achievable at reasonable cost), client-driven (adapt- able t o the client’s other reporting requirements) and monitorable (sufficiently specific). To b e practicable, the policies and guidelines should meet the business case for sustainability, i.e., implementing them should be in a company’s long-term commercial interest. PAGE 40 INDUSTRIES AND SUSTAINABLE DEVELOPMENT EXTRACTIVE - IFC EXPERIENCE Operations Evaluation Group Recommendation Promote disclosure o f fiscal revenues from EI. I F C should encourage 3b: - and consider requiring - i t s clients to publish such information. Paragraphs 14, 62- Where client confidentiality undertakings initially restrict disclosure, 65, 67, 69-71; I F C could report results on an aggregate country, regional, or sectoral Box 8 level and participate in initiatives advocating such disclosure. IFC needs to balance client confidentiality with i t s own accountability as a public institution and the public's desire to know more. On balance, increased communication and transparency i s likely to help IFC and i t s clients and reduce misconceptions, distrust, and criticism. Recommendation Develop, monitor, and report on sustainability indicators. In consulta- 3c: tion with other stakeholders, I F C should develop and track key sus- Paragraphs 5, I I, tainability indicators and consider disclosing them to demonstrate the 39, 51-53 ~ economic, social and environmental impacts o f i t s E1 p r ~ j e c t s . "Re- porting on credible sustainable development indicators will help over- come the current inability to systematically demonstrate results achieved. Recommendation Increase local community participation. This evaluation found strong 3d: evidence that improved community consultation i s in the best long- Paragraphs 33, 36, term interest o f our clients. IFC should thus make community devel- 52, 54-56, 64, 6 6 ; opment programs with ongoing consultations the norm for E1 pro- Box 3 jects. Such programs should start with a participatory assessment o f the community's ~ i t u a t i o n "and ~ long-term development needs. They should include ongoing consultations, focus on sustainable solutions to meet these needs, and prepare communities for the time after the extractive operations cease. Good communication i s also likely to im- prove results - by listening to people and being exposed to public scrutiny and challenge. l4IFC could build o n existing industry initiatives. Information o n industry-specific indicators should include, for example, fiscal revenue generation, health and safety statistics (including H I V / A I D S prevention), gas flaring (or greenhouse gas emissions), adequacy o f mine closure preparations (including funding) and o i l transportation arrangements, hazardous materials management and emergency response plans. I t could also include data t o capture private sector contributions beyond compliance, such as infrastructure, health and education services. The reporting requirements should also include relevant sustainable development indicators, such as water qual- ity, access to potable water o r schooling, and income levels. Other documentation, such as aerial photography and videotaping of the site and surrounding areas could help to later document improvements or deteriorations, and potentially reduce later disputes. '15 Such an assessment should b e conducted as early as possible, and IFC should prepare guidance o n what IFC and i t s clients should do when early consultations were not carried out o r were insufficient. EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE PAGE41 Operations Evaluation Group Recommendation Improve communications with clients. I F C should routinely share best 3e: practice among clients and encourage them to apply it. I F C should Paragraphs 28-29, communicate i t s information needs better to i t s clients, for example 32, 52, 56, 66; by tailoring reporting to their o w n requirements. Clients very much Boxes 2, 3, 5 appreciated assistance they had received from IFC staff, but were ea- ger for more. I F C should build on i t s various initiatives to add value and further facilitate exchange o f ideas among i t s clients, for example by organizing conferences and further developing toolkits o n how to best address environmental and social issues. l6 ' For example, IFC could review the mine closure plans o f a l l existing clients and share best practices among them. PAGE42 INDUSTRIES EXTRACTIVE DEVELOPMENT AND SUSTAINABLE - IFC EXPERIENCE Operations Evaluation Group Annex 1: IFC’s Investments in Extractive Industries 74. Approvals. In the 1960s and 1970s, few developing coun- Extractive Industries: Declining Importance in IFC since 1991 tries considered private sector de- velopment o f their E1 resources. - 350 I F C funded i t s first E1 project, a f 300 - 20% c - 1 Chilean copper mine, in 1958 and E‘ I ul 3 250 5 S only five E1 projects in the subse- 2 - 15% = 200 I n E B quent 12 years, three o f them in the g G Chilean copper sector. As countries ; - - 10% 150 0 loosened control o f their natural = 100 6 resources and permitted private Y - 5% # 50 sector investment, I F C became more active in the sector. Growth 0 0% 7 was initially slow. Prior to FY1980, IFC had only approved 17 projects for US$137 million. Growth then accelerated through 1991, when IFC’s net ap- provals reached almost US$400 million. Approvals have, since 1991, fluctuated at around US$250 million annually, with a similar amount funded through the I F C B-loan syndication program. Compared to IFC’s total approvals, the importance o f E1projects declined substan- tially from around 15 percent in the 1980s to about 6 percent today. Since 1990, IFC has ap- proved over 140 extractive industries projects, predominantly in Latin American and Sub- Saharan African countries (about 30 percent each). 75. Products and funding instruments: Concentrated in oil & gas and gold IFC’s E1 approvals-about US$3.1 billion IFC approvals 1990-2002 ($3. I billion) from 1990 to the end o f 2002-were particu- larly concentrated in o i l and gas production Oil and gas and development (61 percent).’ Gold (16 per- 61% cent) and copper (6 percent) were also impor- tant. IFC has provided loans, equity, quasi- equity, and syndicated investments (mostly loans) to E1 projects. I F C approved relatively less equity investments in E1(12 percent) than for other projects (16 percent) since 1990. In IFC’s outstanding portfolio, however, E1had a larger share o f equity (34 percent) than other projects (26 percent). I F C has been successful in attracting participant funding to E1 - par- 5% Nickel Iron 6% ticipants approved funding for about as much 3% 3% as IFC approved for i t s o w n account. 76. Frontier countries: IFC’s overall strategy does not emphasize E1 as a sector. How- ever, i t does emphasize investments in “frontier countries,” defined as countries with poor ’From 1983 until 1991, IFC also financed o i l and gas exploration, but the amounts involved were small ($60 million). I t ceased to do so, mainly because o f disappointing initial results. EXTRACTIVE lNDUSTRlES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE ANNEX1: PAGE43 Operations Evaluation Group country credit ratings.’ Investments in E1 de- r - ~~ ~ Extractive Industries Outstanding Portfolio pend o n the location o f the natural resources. Jme 30,2002 US$ IFC’s investments also depend on where I F C millinns o/- has a role to play. IFC’s role and contribution in E1 projects was significantly better (95 per- cent satisfactory or better) than in other pro- jects (79 percent). O n average, IFC’s approvals Equity/Quasi-Equity in E1 have been in countries 10 points riskier (on a scale o f 0 to 100) than IFC’s average ap- provals. Thus, operating in E1 allows IFC to invest in risky countries where i t i s often diffi- cult to find other opportunities. For example, in at least a dozen countries IFC’s first approval was in E13 and during the past decade Sub- Change from previous year -1% Saharan Africa received the largest share o f Grand Total 10,720 100% IFC’s E1 approvals. In Sub-Saharan Africa, where foreign direct investment i s scarce, IFC’s extractive industries approvals have ac- Concentrated in Latin America counted for over 40 percent o f IFC’s total ap- and Sub-Saharan Africa provals since 1956. IFC’s outstanding E1 port- IFCapprovals 1990 - 2002 ($3.1 billion) folio at June 30, 2002, was concentrated in Sub Latin America and Sub-Saharan Africa. Saharan Middle East Africa and North 77. More analysis o f IFC’s approvals can 31% Africa be found in the WBG background paper for the E R (www.eireview.orq) and in OEG’s approach paper (www.ifc.ordoeq) . Further details o n IFC’s E1 portfolio performance are Latin included in the main report and in Annex 2. America and Caribbean 30% East Asia Central and and Pacific Eastern 5% Europe 6% ’ Institutional Investor country credit ratings below 30 or without a rating. In this report such countries are re- ferred to as “risky” countries. 3 Chad (2000), Chile (1957), Gabon (1982), Ghana (1984)’ Guinea (1982)’ Guinea-Bissau (1989), Kyrgyz Repub- lic (1995)’ Mauritania (1968)’ Russian Federation (1993)’ Tajikistan (1996)’ Uzbekistan (1994)’ Zimbabwe (1981). ANNEX1 : PAGE44 EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group Annex 2A: Summary Results -All E1 Projects This Annex combines all El projects that OEG reviewed: evaluated projects (Annex 28) using IFC's established evaluation framework (www.ifc.oraloeulx~srs)and studied projects (Annexes 2C & 2D) that used desk reviews and the simplified binary evaluation framework (Annex 2H). Ratings in some case refer to multiple investments in the same company. Note that the comparator- IFC average and non-oil, gas and mining projects refers to projects approved 1991-1996 and evaluated 1996-2001, whereas studied extractive industries projects include both older and newer projects. Development Outcome 'C's Effectiveness tudied projects (various approval years) Oil and Gas Number rated 23 23 17 23 23 23 23 Success rate 61% 78% 94% 65% 51% 83% 87% Mining Number rated 22 22 21 22 22 22 22 Success rate 59% 59% 62% 11% 64% 86% 91% All-E1 Number rated 45 45 38 45 45 45 45 Success rate 60% 69% 16% 11% 60% 84% 89% valuated projects (Approved 1991-96, Evaluated 1996-2001) Oil and Gas (12) Success rate 50% 83% 100% 58% 50% 92% 100% Mining (1 0) Success rate 60% 60% 40% 90% 70% 70% 90% All-E1(22) Success rate 55% 73% 71% 73% 59% 82% 95% I ;C Average (Approved 1991-96, Evaluated 1996-2001) All Evaluations(308) Success rate 60% 44% 58% 65% 12% 55% 60% 80% .. of which non-EI(286) Success rate 60% 44% 57% 65% 72% 54% 59% 79% EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE ANNEX 2: PAGE 45 Operations Evaluation Group Annex 2B: Performance Ratings for Evaluated E1 Projects The 22 El projects were part of a random representative sample of 308 IFC projects approved 1991-1996 and evaluated 1996-2001. The rating scale for development outcome for evaluated projects was highly successful, successful, mostly successful, mostly unsuccessful, unsuccessful and highly unsuccessful; that for the indicators is excellent, satisfactory, partly satisfactory and unsatisfactory. For simplified presentation, the top half of the rating scale appears in the table as S (satisfactory or better, also “positive” in the main text), the bottom half as LS (less-than-satisfactory). In 2002, OEG updated the evaluation framework to better align them with other IFC initiatives (e.g. corporate and departmental scorecards, sustainability initiative). The major change was to reduce the development outcome indicators from six to four; o “Economic growth” and “Living standards” were merged into one indicator “economic sustainability” o “Enabling environment” was merged into “Private sector development” OEG’s current evaluation framework is available at: httD://www.ifc.ora/oealxpsrs/NonfinMarkets/nonfinmktsinsts.html Type: Min = Mining OG = Oil and Gas Outcomes / indicators: S = Satisfactory or better LS = Less than Satisfactory NOP = No opinion possible NIA = Not applicable as this operation featured none I I S I S I S 1 - 1 S I S I S I s I L S I s 1 1 - 1 S I S I S I s I L S I s , I I s I L S I s s I LS I LS S I S I S I 7 S I S I S I S I S I S I S LS qqq LS LS s i s LS ANNEX2: PAGE46 INDUSTRIES EXTRACTIVE DEVELOPMENT AND SUSTAINABLE - IFC EXPERIENCE Operations Evaluation Group Annex 2C: Performance Ratings for Studied Oil and Gas Projects Outcomeshdicators: S = Satisfactory or better LS = Less than Satisfactory NOP = No opinion possible NIA = Not applicable as this operation featured none 3 4 S S S S S S S S S S S S S S S S LS LS S S LS LS LS S S S S S S S S S S S S S LS S S S S S S S S S S S S S NOP LS S S S S LS S S S S S LS S S NOP LS S LS S NOP NIA LS S LS S LS LS S S S S LS S S S S LS LS S ' NOP N/A S S S S N/A S S LS S NOP LS N/A LS LS sslLS ~ LS NOP S LS LS I S I EXTRACTIVE - IFC EXPERIENCE INDUSTRIES AND SUSTAINABLE DEVELOPMENT ANNEX^: PAGE47 Operations Evaluation Group Annex 2D: Performance Ratings for Studied Mining Projects Outcomes/indicators: S = Satisfactoly or better LS = Less than Satisfactory NOP = No oDinion possible NIA = Not applicable as this operation featured none A 1 e, g $3 *E a0 E S S S S S LS S S S S S S -9 S S S S S S S S S LS S S S S S S S S S S S S S LS S S S S S S S S S S S S S LS S S LS S S LS S LS S S LS S LS S S S LS NOP LS S S LS LS LS LS S S LS LS S S LS S S LS S S S S S LS LS S LS LS S LS S LS LS S S LS LS S LS S S LS LS LS LS S S 2: PAGE ANNEX 48 EXTRACTIVE DEVELOPMENT AND SUSTAINABLE INDUSTRIES - IFC EXPERIENCE Operations Evaluation Group Annex 2E: Approved Projects Reviewed by OEG - Mining Evaluated (in bold italics) and studied projects Approved amounts may differ from disbursed amounts (US$millions) H w 2. - ? 8 E. 4E :B J 3. E. i?F 0) R' 5: z 5 M P e. P 8f E; E? 3 Q Y * 5: J= 3956 5s 5 123 123 11.0 a0 1.3 PO BO B 4799 220 13.3 8.3 7.5 ao 0.8 a0 5.0 A 9670 227 iao iao 10.0 0.0 0.0 a0 0.0 B 420 98.4 629 8.9 5.0 3.9 0.0 a0 54.0 N 658 4.0 a4 a4 ao a4 0.0 a0 0.0 N 2649 265. I 60.0 35.0 25.0 ao 10.0 a0 25.0 A 9343 3420 1400 25.0 200 ao 5.0 a0 115.0 A 4494 lgl0 7A 0 34.0 230 PO PO 00 1 0 A 9% 44.8 39.0 23.0 23.0 0.0 0.0 a0 16.0 A IC81 1,143.2 85.0 85.0 70.0 15.0 0.0 0.0 ao N 9u)9 25.0 25.0 25.0 0.0 0.0 25.0 0.0 0,o C dB02 91.2 30 20 0 100 PO 100 a0 SnO B 7346 60 $0 20 20 ao PO PO PO C 27i2 324 PO 9.0 PO PO PO PO PO U 973 60 0.6 a6 0.0 ao 0.6 0.0 0.0 N 4102 ao ao 0.0 0.0 0.0 0.0 0.0 ao B I231 13.5 3.0 3.0 0.0 3.0 0.0 a0 0.0 N 2386 55.4 48.0 18.0 8.4 0.0 8.5 1.1 M.0 B 48% 11.5 10.1 IO. I 0.0 0.0 26 7.5 0.0 B 7261 13.5 4.5 4.5 4.5 0.0 0.0 0.0 0.0 B 10327 13.5 OS 0.5 0.0 ao 0.5 a0 0.0 C 3 w 332 0 1 0 40 0 30.0 PO 100 PO PO A 2429 1226 2.2 2.2 PO 1.5 21.7 PO PO B 7975 62.8 35.0 iao iao 0.0 0.0 a0 25.0 B 9342 34.8 23 23 a0 23 0.0 a0 ao C 43.50 246 2 64.8 3118 32 0 48 PO no 210 A Ti64 1,365.0 l20,O 32aO 55.0 0.0 65.0 0.0 0.0 A 10323 1m , . o 25.0 25.0 25.0 ao 0.0 0.0 0.0 A 46 10.0 3.5 3.5 20 1.5 0.0 0.0 0.0 N 1232 6.0 0.6 0.6 0.0 0.6 0.0 a0 0.0 U 4070 105.8 0.7 0.7 0.0 a7 0.0 0.0 0.0 B 737 21.4 5.2 5.2 5.0 a2 0.0 0.0 0.0 N 8888 0.0 ao ao 0.0 ao 0.0 0.0 0.0 A 2983 45.0 24.7 127 120 0.3 0.3 0.0 120 A 4449 51 8 129 1P9 100 PO PO a9 I O A 992 121.0 1iao 30.0 30.0 ao 0.0 0.0 80.0 A 7192 1220 7.5 7.5 ao 1.2 63 PO PO B 791 I ao 21 21 ao 0.0 0.0 21 0.0 B a5i9 14.7 3.0 3.0 3.0 ao 0.0 a0 0.0 B 8823 9.0 3.0 3.0 0.0 3.0 0.0 0.0 ao B 2448 145 72 0 3Q0 30 0 PO PO PO 45 0 B 48% iiao 246 19.6 16.0 3.6 0.0 0.0 5.0 A 7343 4x0 124.5 74.5 65.0 24 7.1 0.0 9.0 A 10398 98.4 0.3 0.3 ao 0.0 0.3 0.0 0.0 C 8570 334.8 30.0 300 0,o 7.2 228 0.0 0.0 A 3485 28.0 iao 10,o Lao 0.0 0.0 0.0 0.0 B EXTRACTIVE INDUSTRIES DEVELOPMENT AND SUSTAINABLE - IFC EXPERIENCE ANNEX 2: PAGE 49 Operations Evaluation Group Unrated projects, reviewed for issues and lessons Approved amounts may differ from disbursed amounts (US$millions) 7 e. Country Project Name Africa Region MACS MACS 9345 Apr-Ol Active 100 74.0 340 30.0 4.0 - - 40.0 Investment B Mining Services Burkina Faso AEF FasoMine AEF FasoMine 9024 Sep-98 Active 5 1.5 15 1.0 05 - - . Investment B Iron China Daning Coal Daning Coal 10015 May-01 Active 75 300 15.0 13 0 2.0 - - 15.0 Investment A Coal Mining India Sarshatall Coal Sarshatali Coal 7984 Feb99 Active 149 35.0 350 30 0 5.0 - - - Investment Coal Mining Indonesia Dianlia Dianlia 9987 FebOl Active IO 50 50 4.0 - 10 - - Investment Coal Mining Mexico Mexcobre MEXCOBRE SWEW 4313 May-94 Closed 75 60.0 25.0 25.0 - - - 35 0 Investment Copper Pan American Pan American 9800 Jul-99 Active 13 12.5 12.5 - 12.5 - - - Investment A Silver La Colorada 10326 FebOl Active 51 28 6 103 4.0 - 6.0 0.3 18 3 Investment A Silver PanAme-La Colora 10856 FebOl Active 1 12 12 - 12 - - - Investment A Silver PeN Quellaveco QUELLAVECO 3823 Apr-93 Active 31 62 62 - - 62 - - Investment Copper QUELLAVECO - RI 7447 Mar-96 Active 27 53 53 - - 53 - - Rights Issue Copper Minera Q RI 10170 Jan-00 Active 3 0.6 0.6 - 0.6 - - - Rights Issue Copper Russian Federation Julietta Julietta I0020 Sep-00 Active 77 100 100 8.5 - 15 - - Investment Gold Bema Gold Bema Gold 10655 Sep-00 Active 1 1.0 10 - 1.0 - - - Investment Gold Sierra Leone Sierra Rutile SIERRARUTILE 1 2609 Apr-92 Closed 71 200 20.0 20.0 - - - - Investment Nickel SIEROMCO 3999 Jun-93 Closed 27 100 10.0 10.0 - - - Investment Other - - ~ Sierra Restr 9148 May-98 Closed 0 00 00 - - - Restructuring Misc. Ores Tunisia Miniere Bougrine MINIERE BGRN-RI 4677 May-94 Closed 8 09 0.9 - - 09 - - Rights Issue Zinc Uzbekistan Amantytau Gold AMANTAYTAU GOLD 4323 Mar-94 Closed 6 12 I 2 - - 12 Investment C Gold ANNEX 2: PAGE 50 EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE Operations Evaluation Group Annex 2F: Approved Projects Reviewed by OEG - Oil and Gas Evaluated (in bold italics) and studied projects Approved amounts may differ from disbursed amounts (US$millions) n 5. i .c a 7 4 I 7 e. a 3 x - 2 e. H s D. B 3. c. H B E. ! m k? 4 P v1 g-i 0 r 9 E 1 H 4 0 Country Project Name 6 E P 0 t f 8 d 9 3 e Albania Patos M a r i o r a Palm Marines 7429 Mar-98 Active 275 2 108 5 58 5 30 0 28.5 00 0.0 50.0 1""eSlment A 0 & G Production Patoo Marinra I n 10885 Jun-Ol Active I97 5 10 0 10 0 10 0 00 00 0.0 00 lnvcrtmmt A 0 & G Production Argentina BrldadPAE BRIDAS 2 3078 Jun-92 Active 238.0 1300 50 0 35 0 0.0 15.0 00 80.0 lnvesrmmt B 0 & G Raduclion BRIDAS III 5093 Jun-95 Active 221.3 70.0 30.0 20.0 10.0 0.0 0.0 40.0 bveslmrnt B 0 & GProduelion C Bd ips B (SOP) CADIPSA 2979 Oet-92 Closed 83.0 40.0 20.0 10.0 5.0 5.0 0.0 20.0 Re$truclurhg B 0 & G Production Csprs Disdema Dindema Field 7418 Jun-96 Active 70.0 60.0 20.0 15.0 0.0 5.0 0.0 40.0 InwsIment B 0 & G Production Cls.Combustible C I A COMBUSTIBLE 4067 Dec-93 Closed 251 6 80.0 40 0 25.0 I5 0 00 00 40 0 Rcsmrctwing B 0 & G Raductian Hunntriieo I Neuqurn Huanuaico 2764 Oct-91 Active 60 0 17 0 17 0 00 17.0 0.0 0.0 0.0 Rerrmchring A 0 & G Roduction HUANTRAICO (11) 3262 Jun-92 Active 180.4 60 0 25 0 I5 0 10 0 0.0 00 35.0 Investment U 0 & G Roduction Neuqvm 7182 Mar-96 Active 186 0 26 4 26 4 0.0 26 4 00 00 00 lnvcrtmmt B 0 & G Roduction Neuquen Basin R I 9537 Jan-99 Active 50 5.0 5.0 00 50 00 00 00 Rights I s m C 0 & G Rodnetion Azerbaijan Early O i l Early Oil Amoco 7271 Jul-98 Active 650 0 65.7 32.8 32 8 00 00 00 32.8 lnvestmmt A 0 & G Roductioo Early Oil. Exxon 9440 Jul-98 Active 305 4 30 9 15.4 I5 4 00 00 00 15 4 Invcstmmt A 0 & G Roduction Early 0il.LUKOil 9441 Jul-98 Active 382.7 38.6 19.3 193 0.0 00 00 19 3 lnvcstmmt A 0 & G Roduction Early Oil TPAO 9442 Jul-98 Active 259.8 26 1 13 0 13 0 00 0.0 0.0 13 0 lnvcstmmt A 0 & G Roductian Early Oil Unocal 9443 Jul-98 Active 384 7 38.8 19 4 19.4 00 00 00 19.4 Investment A 0 & G Roduction Cnmrrooo Pecten PECTEN (IO 3815 Feb-94 Active 135.0 105.0 40.0 40.0 0. 0 0.0 0.0 65.0 Investment B 0 & GProduction Pcctm ltindi 7621 Fcb-97 Active 115 0 95 0 20 0 20 0 00 00 00 75 0 1nvcsrmmt B 0 & G Roduction - Pectm Mokoka 8498 Mar-98 Activc 265.0 265.0 75.0 75 0 00 00 00 190.0 InYtstment B 0 & G Roduction cango Enge" E N G E N B N G E N CONG 4981 M#y-95 Closed 99.8 91.4 46.4 15.0 2.9 28.5 0.0 45.0 Investment B 0 & GPiodverion Cote d ' l v o i r r CI-11 BLOCK CI-11 3448 Mar-93 Active 45.5 11.4 11.4 0.0 11.4 0.0 0. 0 0.0 Invrslmrnl A 0 & G Production BLOCK CI-11 O I L 4603 Nov-94 Active 66.0 27.3 27.3 0. 0 27.3 0.0 0.0 0.0 InwstmcM A 0 & G Production BLOCK CI-1I-UMIC 4975 May95 Clascd 45 0 35 0 15.0 I5 0 00 0.0 0.0 20.0 Investment A 0 & G Raduction Block CI-11-GNR 7018 May-95 Closed 25.0 17 5 7.5 7.5 00 00 00 10.0 lnvertment A 0 & G Production CI-II-plus petrol 7019 May95 Closed 25 0 17 5 7.5 7.5 0.0 0.0 00 10 0 lnvostmmt A 0 & G Roductioo BiaekCI-l1112 R I 8233 MU.97 Active 50 so so 00 5.0 0.0 00 00 Righls Issue C 0 & G Roduetion B l o c k C I - l l R12 9171 May-98 Active 5.0 5.0 5.0 00 50 00 0.0 0.0 Rights Issue FI 0 & G Roduetion Tripetrol TRIPETROL EXPLOR 3251 Jul-92 Closed 32.0 10.0 10.0 6.0 0.0 4.0 0.0 0.0 InveQment B 0 & GProduetlon Apache Qarun Concession MELEIHA OIL EXPL 873 Iun-86 Active 180.0 79 5 49.5 30 0 19.5 0.0 00 30 0 l"veSlmm1 N 0 & G Roduction MELEIHA I I 995 Sep-87 Active 36 0 9.2 9.2 0.0 9.2 0.0 00 00 Invcstmmt N 0 & G Roduction MELEIHA & AGHAR 2975 Jun-92 Active 36 4 13 0 13 0 0.0 13 0 0.0 00 00 InYeStmmt B 0 & G Roduction Meleiha Phoenix Resource 5127 Oet-95 Closed 10 0 10 0 10 0 0.0 IO0 0.0 0.0 00 lnvcstmmt A 0 & G Roduction Aprlcho Qarun 7211 Ort-95 Closed SI.6 2 7.5 12.5 12.5 0.0 0.0 0.0 15.0 Invrrlmrnl A 0 & G Production PRC Qamn 7422 Oft-95 Closed 93.3 55.0 25 0 25 0 00 0.0 00 30.0 Investmml A 0 & G Radvction Gu~tem~l~ Bade BASIC 3888 Jun-94 Closed 33 0 20 0 14 0 100 4.0 00 0.0 6.0 I~vestmmt A 0 & G Roduction BASIC I1 7407 Jul-96 Closed 73 0 25 8 13 8 12 0 1.8 0.0 00 120 Inwstmmt A 0 & G Roduction Triveni TRNENI 2202 Dec-90 Closed 20 6 06 0.6 0.0 06 0.0 0.0 00 lnvcstmmt U Oilfield S m i c e s AbhabulaWKPzgermunai Akshabulak 7416 Mar-96 Active 266 9 65 7 65.7 0.0 0. I 65 6 00 00 Investmmt A 0 & G Production MarlGPi MAR1 GAS I 1 2837 Dee-91 Closed 47.9 19.5 19.5 19.5 0.0 0.0 0.0 0. 0 Investment B 0 & GPiodurtion PPL PPL 655 NO"-82 Acdvc 176 6 163.4 17.0 15,s 1.6 0.0 0.0 146 4 Investment N 0 & G Production PPL-SUI L I M E 3911 Jun-94 Active 72.5 S2.I 31.1 31.1 0.0 0.0 0.0 21.0 Iwestment B 0 & G Production PPL-SUI L I M E M C 4907 OCI-94 Active 2.0 2.0 00 00 0.0 0.0 00 20 Investment C 0 & G Roduction Poland Amoco Poland COALBED METHANE 3471 Mar-94 Closed 86.5 8.7 87 0.0 00 87 00 0.0 lnvestmmt B 0 & G Roduction Russian Federation Amlner (RussialTTunisla) Oct-96 Aminex Tunisia 7610 Oct-96 Closed 7.2 31 31 0.0 3. I 0.0 00 0.0 lnvestment B 0 & G Roduction Amincx. Kirtsyel 7624 Ocl-96 Active 85.2 20.1 20.1 17.0 3. I 00 00 00 lnvestmmt B 0 & G Roduction Aminex R I 9623 Mar-99 Active 11 01 01 00 0.1 0.0 00 00 Righls Issue C 0 & G Roduction Bitefb Bitech-Shr 8902 Mar-99 Closed 65 0 25 0 25 0 17.5 7.5 0.0 00 0.0 lnvcsrmmt B 0 & G Roduction POlPl POLAR LIGHTS 4040 Jun-93 Ciorod 340.0 60.0 60.0 60.0 0.0 0.0 0.0 0.0 Investment A 0 & GProdvction VPSy"gP0 VASYUGAN 3532 Jun-93 Closed 37.1 11,s 11.5 10.0 0.0 1.5 0.0 0. 0 Investment B 0 & G Production EXTRACTIVE INDUSTRIES DEVELOPMENT AND SUSTAINABLE IFC EXPERIENCE - ANNEX2: PAGE 51 Operations Evaluation Group Unrated projects, reviewed for issues and lessons Approved amounts may differ from disbursed amounts (US$millions) Country Project Name Africa Region SAPTFF SAPTFF 10145 Jun-00 Active 200 80 800 - - - 80 0 - Investment F1-2 Trade Finance Bangladesh Jaialabad Jalalabad I1 9354 Mar-00 Active 163 70 40.0 300 - 10.0 - 300 Investment A O&GProduction Came roon ChadOil-COTCO ChadOil-COTCO 11124 Jun-00 Active - . . . - - - - Investment A O&GProduction Chad ChadOil ChadOil 4338 Jun-00 Active 3,724 400 100.0 1000 - - - 300 0 Investment A O&G Production ChadOil-TOTCO 11125 Jun-00 Active - . . - . . . - Investment A O&G Production Colombia Harken Harken 9484 Jun-99 Closed 158 55 300 200 - 100 - 250 Investment B O&GProduction Kazakhstan Sazankurak Sazankurak 10056 Jun-00 Active 45 20 200 15.0 - 5.0 - - Investment B O&GProduction Kazakhstan FIOC FIOC 10411 Jun-00 Active - 0 00 - 00 - - - Investment B O&GProduction Nigeria Delta Contractor Delta Contractor 10683 Jun-01 Active 30 15 150 15 0 - - - - Investment FI-2 Financecompanies Pakistan Lasmo Pakistan Lasmo Pakistan 10408 Jun-Ol Active 120 40 400 400 - - . . Investment B O&GProduction ANNEX2: PAGE52 INDUSTRIES EXTRACTIVE DEVELOPMENT AND SUSTAINABLE IFC EXPERIENCE - Operations Evaluation Group Annex 2G: Reasons for Not Rating Projects or Companies Country Project Name Reason Mining Africa Region MACS No disbursement yet. Burkina Faso AEF FasoMine No disbursement yet. China Daning Coal No disbursement yet. India Sarshatali Coal No disbursement yet. Indonesia Dianlia No disbursement yet. Mexico Mexcobre Exited, loan prepaid in 1996. Mexico La Colorada Too early to evaluate. The Russian project did not proceed, Mexican project in early start-up. Peru Quellaveco No commercial activity. Russian Federation Julietta Gold / OMGC Too early to evaluate, commenced opera- tions in late 2000. Russian Federation Bema Gold Too early to evaluate, disbursed in late 2001. Sierra Leone Sierra Rutile Original project ceased operations due to civil war. Expansion not yet disbursed. Tunisia Miniere Bougrine Project closed, no information available. Uzbekistan Amantaytau Exited, original project-a feasibility study- was closed. Follow-on project was dropped. Country Project Name Reason Oil & Gas Africa Region SAPTFF No disbursement yet. Bangladesh Jalalabad No disbursement yet. Chad/Cameroon ChadOil Too early to evaluate, no first oil yet Colombia Harken Exited, no current information available. Kazakhstan F l o c Sazankurak Too early to evaluate, disbursed in late 2001. Nigeria Niger Delta No disbursement yet. Pakistan Lasmo No disbursement yet. The companies and projects above were reviewed by OEG. They were considered inappropriate for rating purposes (Le. too early, cancelled, insufficient information, etc.). They did provide valuable issues and lessons that have been used in this report. EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE ANNEX2: PAGE53 Operations Evaluation Group Annex 2H: Evaluation Framework and Rating Guidelines for Studied Projects I.Development Outcome Rating The development outcome rating i s a bottom-line, synthesis assessment o f the operation's results, based on the following four development indicators. Project business success considers the narrow objectives supported by IFC's financing. The best measure o f a project's business success i s its financial rate o f return (FRR). Lacking the data to calculate an FRR, we based this rating o n assessments o f the inputs to an FRR - capital expenditures, cost over-runs, capacity utilization, sales volumes, pric- ing, revenues, margins, profits, taxes, subsidies, etc. o Rates satisfactory when the inputs to an FRR suggest a satisfacto ry FRR. Economic Sustainability considers the project's net economic benefits to all members o f society, which i s best measured by an economic rate o f return (ERR). Lacking the data to calculate an ERR, we based this rating o n assessments o f the inputs to an ERR - the so- cial benefits and costs including taxes paid, benefits to suppliers, effects o n competitors, consumer surplus, effects o n input and output markets, and h o w competitive prices and quantities are determined in relevant markets. I t should also capture non-quantified bene- fits. In particular whether or not the project had a direct impact - positive or negative - o n the poor or o n living standards in the local community. o Rates satisfactory when the net economic benefits are positive and near to expecta- tions and in marginal cases, where a project also has a demonstrably positive effect o n society in the host country. Project's Environmental Effects are based o n the project's compliance with WBG envi- ronmental requirements. o Rates satisfactory if the project i s - and was over i t s lifetime - in material compliance with either IFC's current or at-approval requirements. Private Sector Development considers, as relevant, the upstream and downstream link- ages to private firms, new technology, management skills and training, degree o f local entrepreneurship and competition, demonstration effects, enhanced private ownership, capital markets development; and business practices as a positive corporate role model. It also includes regulatory improvements such as changes in government policy and legal, tax and accounting frameworks and possibly proj ect-related technical assistance or pro- ject activities that have changed the enabling environment to create conditions conducive to the flow o f private capital, domestic and foreign, into productive investment. o Rates satisfactory when the project provides distinctly positive net contributions. ANNEX 2: PAGE 54 EXTRACTIVE - INDUSTRIES AND SUSTAINABLE DEVELOPMENTIFC EXPERIENCE Operations Evaluation Group 11. IFC investment outcome o Rates satisfactory when n o loss reserves exist; loans are not in arrears; equity invest- ments achieve a 5% real return; any loan rescheduling s t i l l provides the full margin originally expected; and any loan prepayment provides greater than 65% o f the origi- nally expected loan income. 111. IFC's Effectiveness 9 Screening, Appraisal, and Structuring o Rates satisfactoy if it met IFC's procedures and good practice standards; 9 Supervision and Administration o Rates satisfactoy if IFC was sufficiently informed to react in a timely manner to any material change in the project's and company's performance; 9 IFC's Role and Contribution o Rates satisfactory if IFC's role and contribution were in line with i t s operating princi- ples; IFC's Effectiveness (Sylzthesis) R a t i n g o Rates satisfactory if IFC's performance was up to a high professional standard. EXTRACTIVE - INDUSTRIES AND SUSTAINABLE DEVELOPMENTIFC EXPERIENCE ANNEX2: PAGE 55 Operations Evaluation Group Annex 3: IFC's Technical Assistance Trust Fund Activities in E1 Trust Funds: IFC Donor-Supported Technical Assistance (TA) Programs, through IFC's Trust Fund Unit approved TA o f US$3.5 million for 22 E1projects since 1994. The majority (84%) o f the funding was approved in the last three years and has increasingly supported sus- tainable development initiatives. Examples include funding for a conference to improve the investment climate for sustainable mining (China); support to bring a coal company into en- vironmental and social compliance (Russia); dissemination o f examples o f successful ap- proaches to HIV/AIDS prevention (Global); and a range o f programs for a gold and copper mining investment (Laos). In 2002, o i l and gas related projects were approved to support an investment forum in Mongolia and privatization assistance in Mozambique. E1 project ap- provals reached 12% o f total approvals in 2002 but have accounted for only 3% o f total ap- provals since 1994. I t i s likely, as E1 projects include more social and environmental devel- opment, that demand for T A T F for E1 will grow. Because Project Completion Reports (PCRs) were generally not completed on the above projects, OEG did a desk review and some one-on-one consultations to better understand project results. Overall, the projects have been broadly successful, but based on the information received OEG was unable to assign project ratings. Amount Average Year US$ YO Proiects YO US$ CountryRegion 1994 100,000 3% 1 5% 100,000 Brazil 1995 225,000 7% 1 5% 225,000 Kazakhstan 1996 115,000 3% 2 9% 57,500 Albania,Tajikistan 1997 43,460 1% 1 5% 43,460 Mongolia (2) 1998 0% 0 0% - 1999 60,000 2% 1 5% 60,000 Africa Region 2000 3 18,000 9% 3 14% 106,000 Tajikistan, Albania, Kyrgyz Republic China (2), Kazakhstan, World Region / Global, Zambia, Lao 2001 800,000 23% 5 23% 160,000 People's Democratic Republic Mongolia, Mozambique (2), Lao People's Democratic 2002 1,795,400 52% 8 36% 224,425 Republic (2), World Region / Global, China (2), Russia 3,456,860 100% 22 100% 157,130 ANNEX 3: PAGE56 INDUSTRIESAND SUSTAINABLE DEVELOPMENT EXTRACTIVE - IFC EXPERIENCE Operations Evaluation Group Annex 4A: Perceptions o f Survey Participants at the EIR Planning Workshop Over 50 stakeholders participated in the EIR Planning Workshop in Brussels (28-30 October, 2001): government entities (9), the private sector (15), non-governmental organizations (21) and the World Bank Group (WBG, 8). In the course o f the workshop, OED/OEG asked participants to "rank" the evaluative questions suggested in the approach paper by importance. About h a l f o f the participants responded. The questions, and the final rankings based on the votes cast are shown below: 1. Distribution o f costs and benefits was ranked first overall and first or second by each group. 2. Environmental and social effects, including effects on local communities, indigenous people, biodiversity and potential human rights abuses, was ranked second overall and among the top six questions by each group o f respondents. 3. Appropriate mitigation mechanisms for environmental and social effects throughout the project cycle was ranked third with some differences o f opinion by the respondents. 4. The WBG's role in improving development impacts and minimizing risks was ranked fourth overall, with roughly equal importance across all groups. 5. Compliance with the WBG's safeguard policies was ranked fifth with wider variation among the respondents. EVALUATIVE QUESTIONS Rank (% o f votes) 1. Project Context a n d Economic Effects 1.1 What was the share o f E1 o f export earnings, GDP and government revenues in the respective country o f WBG op- eration? 1.2 To what extent has there been an association between EI' share o f GDP, and country's economic growth and income I 22 I distribution? 11.3 To what extent were the project's objectives consistent with the country's current development priorities? I 6 (6%) I 1.4 What were the net benefits generated by a specific WBG investment operation? 1.5 H o w are benefits and costs distributed between central government, local government, local communities and private I 11 (3%) I shareholders? I s the distribution perceived to be fair by different stake- holder groups? A r e there conflict resolution 1 mechanisms in place, and if so have they worked? Are there lessons t o b e learned about the consequences o f different (13%) types o f distributions? 1.6 Did the operation have impacts on private sector development in the host country beyond the operation itself (e.g. 17 demonstration effects, linkages, infrastructure development, etc.)? 1.7 Are royalties effectively channeled for developmental purposes? A r e independent arrangements for auditing, moni- 9 toring and evaluation in place? (5%) Rank 2. E n v i r o n m e n t a l and Social Effects (%) 2.1 What have been the environmental and social effects -positive and negative -o f WBG activities in the sector? In particular, what were the effects o n bio-diversity, local communities (including indigenous people)? Have there been 2 human rights abuses associated with WBG projects? (11%) EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT - IFC EXPERIENCE ANNEX4: PAGE 57 Operations Evaluation Group 2.2 Have WBG operations complied with relevant safeguard policies and adequate labor safety standards? H o w adequate 5 are the measures taken to mitigate the most important negative environmental and social aspects, e.g. involuntary re- (7%) settlement? H o w do WBG safeguard policies compare with local requirements? 2.3 Have expected environmental and social effects at each stage o f the project cycle (construction, operation, closure and restoration) been adequately assessed and addressed at appraisal (e.g. through environmental assessments, public 17 consultations, and project design and implementation arrangements? 3 l 2.4 Have actual effects been adequately monitored during supervision? 20 2.5 Have appropriate mechanisms been put in place to handle environmental and social effects throughout the life cycle o f oil, gas and mining operations (e.g. for compensation to adversely affected communities and for mine or field clo- (9%) sure even beyond WBG involvement)? 2.6 Was the operation affected by -or did it even contribute to -c i v i l war? 26 3.1 Did the operation contribute to capacity building at the government (central or local), corporate or voluntary agency level? 3.2 Did corruption increase o r decrease over the life o f the project? I s this change attributable t o the project? 17 3.3 Did the operation improve the framework for property rights in EI, e.g. i s it clear who owns the resource and i s it 21 possible to transfer the rights? and development rightsawarded in a fair and transparentanner? ~~ -ration 3.5 Disclosure: were the benefits f r o m development o f the resource, and their distribution, disclosed? Was the use o f the 8 generated benefits transparently disclosed? What are the issues related to public disclosure? (5%) 4.1 Was WBG financing necessary for a particular project or activity t o proceed? 12(3%) 4.2 Did the WBG help improve the development impacts and minimize the risk associated with oil, gas and mining ac- tivities? H o w and t o what extent did the WBG affect the impacts f r o m the point o f v i e w o f government (central and 4 local), c i v i l society and the companies? In particular, has the WBG helped improve positive environmental and social (7%) aspects, and reduced potential negative aspects in the operations it supported? Has the WBG helped the country ad- dress macroeconomic consequences resulting fro the volatility o f commodities markets? 14.3aDid the WBG help improve the efficiency o f the oil, gas and mining sector and the investment climate in the sector 15 ..... 4.3b.. ... and has this resulted in subsequent private investment without WBG support? 24 I 10(4%) I ~~ o m D i d c o n t r i b G improved governance and G r e a s e d transparency in the sector? ~~ ~~ ~~ 4.5 Did the WBG assess whether the economic benefits f r o m E1 that are retained in the host economy are adequate com- 12 pared to the value o f the resources, and, if so, how? (3%) 4.6 Did the WBG address and influence the distribution o f benefits and costs? Can one establish what impact t h i s had o n 24 poverty reduction? 4.7 Has there been a trade-off between IFC profitability and development outcomes achieved in these sectors? 23 CONTACTS: Andres Liebenthal, Operations Evaluation Department Roland Michelitsch, Operations Evaluation Group World Bank International Finance Corporation PhonelFax: 1 (202) 458-2507 / 1 (202) 522-3123 Phone/Fax: 1 (202) 458-0768 I 1 (202) 974-4302 e-mail: aliebenthal@worldbank.org e-mail: rmichelitsch@ifc.orq ANNEX 4: PAGE 58 EXTRACTIVE - INDUSTRIES AND SUSTAINABLE DEVELOPMENT IFC EXPERIENCE Operations Evaluation Group Annex 4B: Perceptions o f Survey Participants at the EIR Regional Workshops The survey was conducted at the various Extractive Industries Review (EIR) Regional Work- shops. To date, the Latin America and the Caribbean, Eastern Europe and Central Asia and Africa Workshop have been held in R i o de Janeiro, Brazil (April 15-19, 2002), Budapest, Hun- gary (June 18-22, 2002) and Maputo, Mozambique (January 13-17, 2003), respectively. Feed- back from the Asia Workshop (March 2003) was not received in time to be included in this re- port. The purpose o f the regional workshops i s to engage the various regional stakeholders in the EIR. OED/OEG asked the participants to provide their impressions on the need, effort and suc- cess o f World Bank and I F C involvement in the E1 in the region. The response rate for the sur- vey was about 26% as indicated in Table 1. Table I. Stakeholder Survey: Respondent Profile Venue % OF ALL RESPONDENT CATEGORY RIO BUDAPEST MAPUTO TOTAL RESPONDENTS Local NGO 3 5 3 11 14% Global NGO 1 6 1 8 11% Industry 3 8 5 16 21% Government 11 1 19 31 41% World Bank Group 2 0 1 3 4% Other 1 4 2 7 9% No. o f Respondents 21 24 31 76 100% No. o f Workshop Participants 85 80 127 292 % of Respondents to Participants 25% 30% 24% 26% Responses pertaining to IFC Perception Survey Results - AU Workshops by Participant Type QuESllONS AU NGO Gmmment WBG Other Total Responsew patter than 60% EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT IFC EXPERIENCE - ANNEX 4: PAGE 59 Operations Evaluation Group ANNEX4: PAGE 60 INDUSTRIES AND SUSTAINABLE DEVELOPMENT EXTRACTIVE - IFC EXPERIENCE Operations Evaluation Group A n n e x 4C: Perceptions o f WBG Staff Surveyed The survey o f WBG staff included 66 questions and room for comments. The questions were de- signed to get the views o f staff on the relative importance o f issues for E1 dependent countries and to determine if they feel that the WBG addresses them adequately. Revenue Generation: generating higher fiscal revenues from E1production activities Revenue Distribution: fair allocation o f fiscal revenues among central/federal govem- ments, subnational (provincial/district/municipal) governments, and local communities (villages, indigenous) Revenue Utilization: allocation o f fiscal revenues from E1for developmental priorities Mitigating Negative EnvironmentalImpacts: from past E1activities or new ones Mitigating Negative Social Impacts: from past E1 activities or new ones Capacity-buildingfor E1 sector management: including policy/legal/technical/business issues Improving the Investment Climate: legal/regulatory framework; property rights Improving Transparency and Governance: more public disclosure; reducing rent- seeking The survey also asked staff to provide views on the level o f coordination between IFC, MIGA and the World Bank, on risk aversion toward EI, and on the constraints o n the WBG’s involve- ment in El. Questionnaires were sent out by e-mail and respondents were given about a month, until February 24, 2003, to respond. The 66 persons (69%) that responded have, o n average worked for WBG for about eight years (ten years for World Bank respondents and about 6 years for IFC and MIGA) and indicated familiarity with 48 E1dependent countries. Table 2. Staff Survey: Respondent Profile Organization % OF ALL RESPONDENT CATEGORY World Bank IFC MIGA TOTAL RESPONDENTS Task Managers 12 12 18% Investment Officers 24 24 36% Regional Economists 14 6 20 30% Underwriters 5 5 8% Other 5 5 8% Number of Respondents 26 30 10 66 100% Number o f surveys distributed 51 33 12 96 Response rate (%) 51% 9 1Yo 83% 69% EXTRACTIVE INDUSTRIES AND SUSTAINABLE DEVELOPMENT- IFC EXPERIENCE ANNEX 4: PAGE 61 Operations Evaluation Group Joint Operations Evaluation Department/Group/Unit Staff Survey Results Revenue Generation Revenue Distnbution Revenue Utilization adequately addres Revenue Generation Revenue Distnbution Revenue Utiluation itigating Negative EnvironmentalImpacts egative EnvironmentalImpacts egative Social Impacts Iding for E1 sector management the Investment Climate 5.Non-lending interventions adequately - Revenue Generation Revenue Distnbution Revenue Utilization Mitigating Negative EnvironmentalImpacts Mitigating Negative Social Impacts Capacity-building for El sector management Improving the Investment Climate Improving Transparency and Governance ANNEX4: PAGE62 INDUSTRIES AND SUSTAINABLE DEVELOPMENT- EXTRACTIVE IFC EXPERIENCE Operations Evaluation Group Joint Operations Evaluation Department/Group/Unit Staff Survey Results ordination between IFC and WB on sectoral issues ategic integration of sectoral and macro interventions WBG management WBG task managers Client country govemment E1 public agencieslenterprises Inadequate linkage between E1 sector activities and sustain- Inadequate availability of staff with appropnate skills Pressure for rapid processingo f creditslfundinglguarantees Inadequate level o f support from the Bank's Country De- parimentlCountry Management Unit Inadequate level o f support from the Global Product Groups for Oil, Gas and Mining Inadequate level of support from the client government Inadequate level o f support from project implementor toral agency or pnvate sponsor) Rating Scale - Question 1: Response is less than 40% 1 = Not at all Important Response i s less than 60% and 40% or more 2 = Moderately 3 = Important 4 = Highly Important High = % responding 4. Positive = % responding 3 or 4 Rating Scale - Questions 2 9: - 1 = Strongly disagree 2 = Disagree 3 = Agree 4 = Strongly agree High = % responding 4. Positive = % responding 3 or 4 EXTRACTIVE DEVELOPMENT INDUSTRIES AND SUSTAINABLE IFC EXPERIENCE - ANNEX4: PAGE 63 Operations Evaluation Group A n n e x 5: Relevant IFC Safeguard Policies, Guidelines, and Procedures SOURCE: http://we ifc.o r d e n v i r o The following social and environmental safeguards policies apply to extractive industries projects, as appropriate. Environmental Safeguards Policies: OP 4.0 1 Environmental Assessment - October 1998 0 OP 4.04 Natural Habitats -November 1998 0 OP 4.36 Forestry -November 1998 0 OP 4.37 D a m Safety - September 1996 (IFC n o w reportedly uses a 1999 draft policy, but it i s not in the public domain) 0 OP 7.50 International Waterways -November 1998 0 OP 7.60 Disputed Territories -June 2001 Social Safeguards Policies: 0 OD 4.20 Indigenous Peoples - September 1991 0 OD 4.30 Involuntary Resettlement - June 1990 0 OPN 11.03 Cultural Property - September 1986 0 IFC’s Statement o n Child and Forced Labor - March 1998 OP 7.60, OD 4.20, OD 4.30and O P N 11.03 remain as World Bank policies, while the others have been modified and updated to better correspond with the IFC business model. Guidelines contained in the Pollution Prevention and Abatement Handbook (PPAH) or updated http://www.i f c .org/enviro/enviro/pollution/guidelines .htm: 0 General Environmental Guidelines (1993 & 1998); 0 General Health and Safety Guidelines (1998); 0 Base Metal and Iron Ore Mining (1998) 0 Coal Mining and Production (1998) 0 Oil and Gas Development - Onshore (1998) 0 Oil and Gas Development - Offshore (2000) 0 Mining and milling - Underground (1995) 0 Mining and Milling - Open Pit (1995) 0 Hazardous Materials Management Guidelines (200 The P P A H also includes various other guidelines o n envi onmental management, fire safety, waste minimization, pollution prevention, air pollution control and wastewater management, cleaner pro- duction, risk assessment, trans-boundary issues (GHG), and pollution management o f various chemi- cals all o f which may also be relevant in a specific project. A “precious metals” guideline i s s t i l l pending. I F C has specific requirements for Public Disclosure and Public Consultation depending upon the categorization o f the project.’ ‘ http:llwww.ifc.or~lenviroienviroiDisclosure-Policvldisclosure.htm ANNEX5: PAGE 64 INDUSTRIES AND SUSTAINABLE DEVELOPMENT EXTRACTIVE - IFC EXPERIENCE Operations Evaluation Group Annex 6: Selected Sustainability Guidance Material - Consultation Consultation could be defined as a wider continuous process o f participation o f all stake- holders in the decisions throughout the formulation and execution o f a project leading to a sustainable development for the population in the area. Consultation, formally, i s part o f the environmental impact assessment o f the project. In practice it i s a tool for managing two-way communication between the developer and the public, in general, and the local community, in particular. Consultation should be understood as a means to achieve certain goals and not as a goal in itself. I t s basic purpose i s to improve decision-making, and build understanding, by actively involving individuals and organizations with a stake in the project. This involvement will in- crease the project's long-term viability and will enhance i t s benefits to 10 ally- impacted peo- ple and other stakeholders. The process o f consultation and participation should include precise agreements that could be adapted and monitored throughout the l i f e o f the project. Consultation should have an impact on the project design and implementation. I t should be started by the appropriate government agency prior to licensing or contracting o f the area, and should be continued by an o i l com- pany that assumes the operation from the early seismic works through drilling operations, development and exploitation, and formal abandonment. When possible, the consultation process should be witnessed by a third party (Le., the ombudsman office and/or an associa- tion o f environmental NGOs). Emerging Best Practices on Consultation A l i s t o f best practices comprises the following points: Consultation requires exchange o f in- formation, collaboration, and mutual understanding o f the parties involved. I t often proceeds through cultural barriers, drops bad past legacies, and ends up creating confidence and trust. I t i s essential to identify the representatives o f key stakeholders and local authorities, including existing alliances, social structures, and possibly prevailing conflicts among local groups and/or extemal groups and NGOs. Where indigenous peoples have their own representative organizations, such organizations should be the channels for communicating their preferences. Governments have an important role to establish first contacts with the indigenous popula- tion, gathering adequate social], cultural information, and introducing the new contractor. This kind o f information i s usually in the hands o f academia and NGOs rather than govem- ment alone. Governments and the concerned private companies should make an effort to gather and review this information as early as possible. Consultation should include the provision o f information on the project in a timely, complete, and culturally appropriate fashion. I t should lead to a meaningful dialogue and provide re- corded results, including the views and recommendations o f the indigenous peoples for the protection o f the environment and the mechanisms put in place for their participation. EXTRACTIVE INDUSTRIES DEVELOPMENT AND SUSTAINABLE - IFC EXPERIENCE ANNEX6: PAGE65 Operations Evaluation Group Mechanisms should be devised for direct participation by indigenous peoples in decision- making on aspects o f the project that affect them directly. Such participation shall take place throughout project design, implementation, monitoring, and evaluation. Proper consultation hence requires developing local capacity to interpret the technicalities o f environmental studies, understanding the impact o f international markets, developing long-term solutions, and being able to effectively communicate complex issues across cultural barriers. I t requires time to obtain consensus on an adequate community relations program. Resulting delays could create conflicts if contract terms are not properly established. Consultation-by the government prior to the contract or by the company as part o f the envi- ronmental impact assessment o f any important operation-requires the preparation o f typical business plans, including identification o f objectives, responsibilities, and inputs to be ac- complished by each stakeholder. Some Practical Recommendations To organize a consultation: Designing meaningful consultations with indigenous peoples depends upon several factors, including the national, legal, and political context; the linguis- tic and cultural characteristics o f the indigenous groups; and the degree o f interaction and relationships with the regional and national societies and external social actors (that is, mis- sionaries, school systems, local traders, and loggers). I t also depends on the nature o f their traditional social organizations and leadership patterns, and the groups organized to represent the interests o f indigenous peoples. Despite these differences there are some general princi- ples for organizing and conducting meaningful consultations with indigenous peoples. These include the following: 1. Use o f facilitators who know the indigenous languages and are knowledgeable about the indigenous cultures; 2. Creation o f appropriate settings and locations for the consultations, preferably in the terri- tories and settlements where indigenous peoples live; 3. Provision o f background information on the proposed project in a language and format that i s understandable to the population (for example, simple diagrams and charts in the native languages, maps, videos, 3 D models); 4. Recognition o f the time frames o f indigenous peoples, especially in terms o f decision- making, that are often different from those o f outsiders; 5. Respect for indigenous leadership patterns and religious beliefs, and ensuring that elders and other traditional authorities have the opportunity to express their points o f view; 6. Recognition that in some cases there may be different factions within a community with contrasting views o n national development projects and establishment o f methodologies for the peaceful resolution o f conflicts and differences; 7. Provision o f resources (e.g. food, shelter, travel funds) so persons can attend the consulta- tions from distant villages or their representatives can attend consultations in district, provincial, or national capitals; 8. Ensuring that interpreters are provided for indigenous participants when consultations are held in district, provincial, and national capitals; ANNEX6: PAGE66 EXTRACTIVE INDUSTRIES AND SUSTAINABLE - DEVELOPMENTIFC EXPERIENCE O p e r a t i o n s E v a l u a t i o n Group 9. Support to the local and regional indigenous leadership to improve communications with their communities and to be able to follow up the consultation process; and 10. Dealing with gender issues. To manage a consultation process: To manage consultation at any point o f the project life, the project developer should take into consideration the following steps: 1. Plan ahead: to identify the project risks, the parties to be involved, and the stakeholders' interests and institutional goals; to understand past experiences, if any, and to effectively fulfill regulations. 2. Test your proposals: to ensure that the key stakeholders understand the project impacts and benefits and would be able to voice their concerns and input alternative approaches. Prepare good responses to obvious questions. 3. Invest time and money: the schedule and budget o f the project should properly include the consultation effort. Involve consultants and permanent staff with appropriate qualifica- tions. 4. Involve senior and local managers: their direct participation will make the entire com- pany understandthe importance o f integrating the stakeholders concerns. 5. H i r e and train the right personnel: a community liaison advisor with direct access to management and certain negotiation capacity should be appointed and would be respon- sible for hearing the local concerns. The advisor could also work with community liaison officers, depending on the size o f the project. 6. Maintain overall responsibility: manage carefully consultants and subcontractors to avoid bad feelings from affected people who will not differentiate contracted personnel from the company itself. 7. Coordinate a l l related activities: to provide consistency in the information conveyed by all company staff to all outside stakeholders. 8. Build dialogue and trust: develop two channels o f communication, preferably in the local language. Particular attention should be given to women and less powerful groups, and actively include them in a culturally appropriate way into the dialogue. I t i s important to maintain the personnel that interacts with the stakeholders. As in personal relationships, continuity and familiarity build trust. 9. Manage expectations: avoid unrealistic expectations. B e clear in describing the project impact and what i t could deliver, trying not to overstate the benefits. 10. Work with governments: inform and consult with relevant govemment departments re- garding the activities, risks, and opportunities o f the project and the required permits. Work closely with local authorities who often have long- established relations with the local communities and who could delineate responsibilities between the local municipali- ties, the community leaders, and the project sponsor. 11. Work with NGOs and community-based organizations: identify and liaise, particularly with those who represent the affected people. NGOs have vital expertise, local knowl- edge, and could be sounding boards for project design and mitigation efforts. Initial re- search i s important to understand local power dynamics and to ensure that NGOs truly represent and convey the community interests. 12. Prepare a y2 action plan: consolidate in an action plan the agreed projects, including tim- ing and indicators for monitoring. EXTRACTIVE - INDUSTRIES AND SUSTAINABLE DEVELOPMENT IFC EXPERIENCE ANNEX6: PAGE67 Operations Evaluation Group Government responsibilities: Government responsibilities within the process o f consultation could be grouped in the following list: 1. To set adequate regulations 2. To provide land tenure rights 3. To keep a database with socio-cultural information available to interested companies 4. To carry out the first consultation 5. To contract areas allowing enough time for preparing adequate environmental impact as- sessments involving effective public consultations 6. To facilitate the process o f consultation between industry and indigenous peoples, ensur- ing due representation o f the parties and providing validity to the agreements reached 7. To establish proper l i n k s between the companies' community relations program, the communities' Planes de Vidal and the regional development plans with respect to educa- tion, health, infrastructure, defense, and the activities o f other productive sectors in the region 8. To supervise the execution o f agreed plans and audit accounts 9. To mediate in case o f conflicts. ANNEX6: PAGE 68 EXTRACTIVE - INDUSTRIES AND SUSTAINABLE DEVELOPMENTIFC EXPERIENCE Operations Evaluation Group