Report No. 26373 Extractive Industries and Sustainable Development An Evaluation of World Bank Group Experience (In Four Volumes) Volume II: World Bank Experience July 29, 2003 Operations Evaluation Department Document of the World Bank Abbreviations and Acronyms AAA analytical and advisory activities LAC Latin America and the Caribbean Region AFR Africa Region MNA Middle East and North Africa Region ASM artisanal and small-scale mining NGO nongovernmental organization CAE Country Assistance Evaluation NPV net present value CAS Country Assistance Strategy OD Operational Directive (World Bank) CDP Community Development Program OP Operational Policy (World Bank) EAP East Asia and the Pacific Region PPAR Project Performance Assessment Report ECA Europe and Central Asia Region PSC Production-Sharing Contract EIR Extractive Industries Review PSD private sector development EMP Environmental Management Plan PSR Project Supervision Report ERL Emergency Rehabilitation Loan RAP Resettlement Action Plan ERR economic rate of return SAL Structural Adjustment Loan GDP gross domestic product SAR Staff Appraisal Report GEF Global Environment Facility SAS South Asia Region GHG greenhouse gas SECAL Sectoral Adjustment Loan GPG Global Products Group SIL Specific Investment Loan ICR Implementation Completion Report SSM small-scale mining IMF International Monetary Fund TA technical assistance IP Inspection Panel TAL Technical Assistance Loan IPAP Indigenous People’s Action Plan UNDP United Nations Development Program IPDP Indigenous Peoples’ Development Plan 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 financial intermediaries. Sustainable development 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 a major source of net benefits (beyond the project financiers) obtained from the ex- traction of mineral resources, the interests of future generations can be protected through the efficientutilization of these revenues for people in the host country. Revenue manazement 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 De- partment (OED) of the Bank, the Operations Evaluation Group (OEG) of IFC, and the Operations Evaluation Unit (OEU) of MIGA. These units are independent of WBG management and report to the WBG’s Board through the Director-General, Operations Evaluation. Resource-rich, and EI-dependent are used interchangeablyin this report to refer to developing countries whose average annual export value of oil, gas, or mineral products exceeds 15 percent of total exports. This standard has been 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 ifthe approximateshare ofthe mining sector is.. .greaterthan 1&25 per- cent of export earnings...” For a list of countries meeting this criterion, see Annex B. Director-General, Operations Evaluation : Mr. Gregory K. Ingram Director (Acting), Operations Evaluation Department : Mr. Nils Fostvedt Manager, Sector and Thematic Evaluations : Mr. Alain Barbu Task Manager : Mr. Andres Liebenthal i Contents . 1 Introduction .................................................................................................................. 1 Background and Context.......................................................................................... i Study Objective and Process .................................................................................... 3 Evaluation Criteria ................................................................................................. - 3 Evaluation Process .................................................................................................. 4 Structure of the Report ............................................................................................ -4 2 . World Bank’s E1 Role and Portfolio .......................................................................... 6 The Bank’s Evolving Policy and Role in the Extractive Industries ......................... 6 Overview of the 1980s and 1990s Projects .............................................................. 9 Highlights of the Portfolio of Projects under Review: FY93-FY02 ...................... 11 3 . Economic Benefits from Bank Projects ................................................................... 13 Reporting of Economic Benefits., .......................................................................... -13 Economic Benefits from Private Sector Development (PSD) ................................ 14 Economic Benefits from Mine Closure or Rehabilitation ...................................... 16 Economic Benefits from Environmental Clean-up and Mitigation ........................ 17 Economic Benefits of Artisanal and Small-Scale Mining ...................................... 18 Conclusions ............................................................................................................ 18 4 . Environmental and Social Impacts and Their Mitigation ..................................... 20 Addressing Environmental and Social Impacts .................................................... -20 Consistency with Objectives of the Safeguards: “ D o No Harm” ......................... -21 Issues During Safeguards Implementation ................................................ 22 Initial Project Screening ................................................................. 23 EA Categorization.......................................................................... 23 Identification o f Applicable Safeguards ........................................ 25 Supervision, Monitoring, and Consultation ............................................... 26 Beyond Safeguards: “Doing Good” ...................................................................... 29 Addressing Pre-existing Environmental Conditions .................................. 29 Capacity-Building and Reform for Environmental and Social Management .............................................................................. 30 Other Environmental Benefits from Extractive Industries Projects ..........31 Missed Opportunities in Addressing Adverse Impacts.............................. 31 Conclusions ............................................................................................................ 31 11 5 . From Resource Revenues to Sustainable Development ......................................... 33 Linking E I Sector Development to Overall Country Assistance............................ 33 Managing Volatility and Exhaustibility o f Revenues ................................ 37 Revenue Generation ................................................................................... 37 Revenue Distribution ................................................................................. 39 Revenue Utilization ................................................................................... 40 Coordination Across the World Bank Group......................................................... 40 Conclusions ............................................................................................................ 42 6 . Addressing the Challenge o f Governance ................................................................ 43 Project Components Relating to Governance and Transparency ........................ -44 Addressing Governance at the Country Level ....................................................... 47 From Governance Awareness to Project Design ....................................... 48 Sequencing E1Lending vis-&vis Improved Macro and Sectoral Governance ............................................................................ 49 Conclusions.,......................................................................................................... -50 . 7 Recommendations ...................................................................................................... 52 Boxes 1.1: The “Paradox o f Plenty” ............................................................................................... 2 2.1 : Channeling the Bank’s Convening Power for Sustainable Development o f the Extractive Industries Sectors ........................................................................................ 7 2.2: Climate Change: The WBG’s Approach ...................................................................... 8 3.1 : Experience with Private Sector Development in the Extractive Industries Sectors ...14 3.2: Economic Benefits o f RehabilitatiodClosure o f Uneconomical M i n e s..................... 15 3.3: Artisanal and Small-Scale Mining............................................................................. -18 4.1: World Bank Projects and Pre-Existing Environmental Impacts................................. 29 5.1 : Analytical and Advisory Activities in the E1 Sectors ................................................. 34 5.2: E1Revenue Management and Macroeconomic Performance: Some World Bank Country Experiences .................................................................................................. 35 5.3: H o w Effective A r e Resource Funds?.......................................................................... 37 5.4: Distribution o f E1Revenues - Striking the Right Balance ....................................... 38 5.5: Applying E1Revenues to the Right Developmental Priorities ................................... 40 3.1: Economic Evaluation in Implementation Completion Reports .................................. 13 ... 111 Figures 1.1: Slower Economic Growth with Greater E1Dependence .............................................. 2 2.1 : Increased Lending to Mining Has Been More than Offset by Decreased Lending to Oil & Gas ................................................................................................................. 9 2.2: Quality o f World Bank Lending for E1Sector Projects ................................................ 9 2.3: Institutional Development Impact for E1Sector Projects ............................................. 9 2.4: Sustainability o f Outcomes for E1 Sector Projects ....................................................... 9 2.5: The Europe and Central Asia Region Accounted for the Largest Share o f Lending in Both Sectors ............................................................................................. 10 4.1: Initial Project Screening and Consistency with Safeguards ....................................... 22 4.2: Adequacy o f Project Supervision and Change in Consistency with Safeguard Objectives ................................................................................................... 26 5.1: Percentage o f Countries whose CAS Refers to E1Issues ........................................... 33 5.2: IBRD/IDA Lending per Capita (no . o f countries) ...................................................... 33 6.1: Worse Country Governance with Greater EI-Dependence ......................................... 42 V Acknowledgments This report has been written by Andres Liebenthal and Ramachandra Jammi, with inputs from the three background papers prepared by Roger Batstone (Safeguards Study), Melissa Tho- mas (Governance Study), and Luis Ramirez Urmtia (Revenue Study) and from five country case studies prepared by Dominique Babelon and Charles Dahan (Ecuador and Equatorial Guinea), Richard Berney (Kazakhstan), and Sunil Mathrani (Ghana and Papua New Guinea). Special thanks are due to the members o f our advisory panel, who provided unique per- spectives and advice: James Cooney, General Manager, Strategic Issues, Placer Dome Inc.; Cris- tina Echavarria, Director, Mining Policy Research Initiative, International Development Re- search Centre (IDRC); h i n d Ganesan, Director, Business and Human Rights, Human Rights Watch; Michael Rae, Program Leader, Resource Conservation, WWF, Australia (formerly World Wildlife Fund, now World Wide Fund for Nature); and David Rice, Group Policy Ad- viser, Development Issues, BP. The report benefitedimmensely from the insights o f past andpresent operational staffwho kindly agreed to be interviewed and generously shared their insights about their projects: Eleodoro Mayorga Alba, Natasha Beschorner, Mohammad Farhandi, Mansour Farsad, Nelson de Franco, Hermann von Gersdorff, Alfred Gulstone, Richard Hamilton, Marc Heitner, Heinz Hendriks, Charles Husband, Salahuddin Khwaja, Paivi Koljonen, Marie Ange Le, Maria Lister, Charles McPherson, James Moose, William Porter, Emile Sawaya, Robert Taylor, and Chris Wardell. A number o f staff inthe WBG’s global product groups for oil, gas and mining, countryde- partments, network anchors, regions, and OED provided valuable comments, suggestions, and cor- rections duringpreparation o f the report and background papers: Craig Andrews, Henk BUSZ, Anis Dani, Poonam Gupta, Michael Haney, David Hanrahan, John Johnson, Charles Di Leva, Stephen Lintner, Jean-Roger Mercier, Helga Muller, K y l e Peters, Anwar Shah, John Strongman, Rodrigo Suescun, and Peter Thomson. Our particular thanks go to Clive Armstrong and Paul Andre- Rochon who organized staff and management feedback and put i t in a coordinated framework. We are also grateful for the 102 stakeholder representatives and 66 World Bank Group staff who responded to our surveys. Soon-Won Pak provided administrative assistance. William Hurlbut edited the report. Maria M a r and Alex McKenzie helped set up the online survey o f WBG staff. Aracely Bara- hona-Strittmatter translated two country case studies into Spanish. 1 1. Introduction BACKGROUND AND CONTEXT 1.1 In resource-abundant countries, the extractive industries should be expected to play a ma- j o r role in support o f sustainable development. They can be an important source o f government revenues and foreign exchange, and generate employment in otherwise economically neglected areas. They can attract investment for local and national infrastructure, and provide countries with opportunities to strengthentheir institutional and administrative capacities. But these same industries also provide opportunities for rent-seeking that can hinder the conversion o f E1reve- nues into sustainable development. Paradoxically, over the past three decades, resource-abundant developing countries have experienced poor economic performance in higher proportion than resource-poor developing countries. The factors that lead to underperformance have been exten- sively studied but are not fully understood, nor i s the design o f appropriate strategies for dealing with them (see B o x 1.1, next page). 1.2 The World Bank helps i t s client countries develop their mineral resources through a vari- ety o f lending and non-lending activities in the extractive industries. Lending assistance i s pro- vided through specific investment loans, technical assistance, and structural adjustment loans. Non-lending activities consist o f a variety o f advisory and analytical activities, including sector- related economic and other studies, workshops and conferences, and training. The focus o f the Bank’s involvement has evolved over four decades, beginningwith an emphasis o n production and exploration in the 1960s and 1970s, proceeding to commercialization o f state enterprises in the 1980s and private sector development in the 1990s, and to a more inclusive approach involv- ing c i v i l society, local governments, and the private sector in recent years. 1.3 The involvement o f the Bank and the World Bank Group (WBG) in the extractive indus- tries has come under increased scrutiny in recent years from several sections o f c i v i l society. Some are concerned that the extractive industries exact a heavy toll on the environment, with the poorest citizens paying the highest price, and they have put the spotlight on the treatment o f local populations, especially where a project involves involuntary resettlement.’ Others have been concerned with issues o f poor governance and failure to effectively use rents to support sustained economic development.2 At the Annual Meetings in 2000, some nongovernmental organizations (NGOs) presented the WBG with a request asking i t to stop supporting the extractive industries because, in their view, the adverse environmental, social, and governance impacts outweigh whatever economic and social benefits may accrue to the domestic economy and the poor from the extractive i n d ~ s t r i e s . ~ 1. Friends o f the Earth 2001. 2. Ross 2001. However, i t i s important to note that while the issue o f “whether or not mining usually promotes eco- nomic development remains unresolved, there i s widespread agreement that richmineral deposits provide develop- ing countries with opportunities, whch in some instances have been used wisely to promote development, and in other instances have been misused, hurting development” (Davis and Tilton, 2001). 3. Letter from Friends of the Earth International to Mr.James D. Wolfensohn, President of the World Bank Group, dated October 30,2000. 2 Box 1.1: The “Paradox of Plenty” Inrecent decades, many resource-abundant developing countries have experienced significantly lower rates o f growth than resource-poor developing economies. This phenomenon i s often accompanied by poor govemance and lack o f transparency inmanaging E1revenues, and significant negative environmental and social impacts. This phenomenon i s often referred t o as the “paradox o f plenty”. Figure 1.1: Slower Economic Growth with Greater El Dependence* t - -f ** A a -10.00 : c3 (3 -15.00 I I 0 20 40 60 80 100 (%) Average El Exports / Total Exports: 1990-99 Source: World Bank: World Development Indicators Economists and social scientists (among them, Gelb 1988, Sachs and Warner 1995, Auty 2000, and Isham 2002) have proposed several explanations for the phenomenonand strategies to deal with it, but no single modelyet synthe- sizes the interplay o f institutional, social, and political factors that i s b e h d the observedparadox.** The emerging consensus i s that the underperformance ofresource-abundant developing countries, to the extent that it is the result of institutional and policy failure, i s not inevitable. Overall, while the technical requirements for managing volatile and exhaustible revenue flows and other impacts such as the so-called Dutch disease, and devoting them to sustainable development are well understood, creating good governance appears to be at the heart o f the institutional and policy changes needed to improve fiscal management, mitigate negative environmental and social impacts, and maximize benefits from the development o f extractive industries. Another perspective o n this debate i s that “the appropriate public policy question i s not should we or should we not promote mining inthe developing countries, but rather where should we encourage it and h o w can we ensure that it contributes as much as possible to economic development and poverty alleviation” (Davis and Tilton 2001). * This relationship, which i s statistically significant at the 95 percent confidence level (t-statistic = -2.39), illustrates a conclusion that i s widely accepted in the literature. N o claim is made that E1dependence i s the sole determinant o f a country‘s economic growth. When non-borrower countries are included in the regression, the slope i s also statistically significant (t-statistic = -2.82), and steeper (-0.038 vs. -0.032). ** Analysis in the 1960s focused on h o w to manage the macroeconomic impacts o f resource export income, which raised domestic prices and made other exports less competitive intemationally (so-called Dutch Disease). More recent analysis emphasizes poor use o f fiscal revenues from resources. 1.4 Inresponse to these concerns, the independent evaluation units o f the World Bank Group4 have prepared evaluations o f the extractive industries activities supported by the WBG. Concur- rently, WBG management launched the Extractive Industries Review’ to better understand stake- 4. The Operations Evaluation Department (OED) o f the W o r l d Bank (IBRD and IDA), the Operations Evaluation Group (OEG) o f the International Finance Corporation (IFC), and the Operations Evaluation Unit (OEU) o f the Multilateral Investment Guarantee Association (MIGA). 5. The Extractive Industries Review (EIR) i s headed by Dr. Emil Salim, former Minister o f Environment for Indo- nesia. Additional information o n the EIR can be found at www.eireview.org. 3 holder views and advise the Bank on i t s role in the sector. W h i l e the evaluations have consulted with the EIR, they constitute a separate exercise that has beenconducted independently.This vol- ume reports on the Operations Evaluation Department evaluation o f the World Bank’s experience. STUDY OBJECTIVE AND PROCESS 1.5 This evaluation assesses the effectiveness o f the World Bank in enhancing the sustainable development contribution o f the extractive industries, and distills lessons from experience to in- form the Bank’s formulation o f i t s future role inthe sector. The evaluation design i s based on the widely supported view that the main elements o f a strategy to address the underperfonnance o f many resource-abundant countries will be sound fiscal policies, rigorous mitigation o f negative environmental and social impacts, and good govemance.6Thus, the evaluation focuses on assess- ing economic effects, environmental and social effects, and govemance issues associated with the Bank’s interventions in the sector: Economic Effects Improving the generation o f fiscal revenues from the develop- ment o f extractive industries Promoting the distribution and expenditure o f the revenues in support o f sustainable development and poverty reduction Strengthening the framework for managing the volatility and exhaustibility o f fiscal revenues from extractive industries Ensuring the adequacy o f provisions for legal entitlements and compensation for negative impacts Environmental Mitigating the adverse environmental impacts and enhancing and Social Effects positive impacts Mitigating the adverse social impacts, including those associated with resettlement and closure o f existing facilities, and contrib- uting to social objectives Governance Improving the institutional and policy framework Strengthening govemance processes EVALUATION CRITERIA 1.6 At the project level, this study evaluates the effectiveness o f Bank-supported E1projects based on an assessment o f their outcome, sustainability, and institutional development i m p a ~ t . ~ At the country level, the Bank’s effectiveness i s evaluated based on an assessment o f the overall coherence, level o f effort, and results o f i t s assistance to resource-abundant countries for enhanc- ing the contribution o f the extractive industries to sustainable development. 6. Seminal papers by Gelb (1988), Sachs and Warner (1995), Auty (2000), and Isham (2002) have discussed the evolution o f thinking o n the subject in recent years. 7. See Annex C for an explanation o f OED’s project ratings scale. 4 PROCESS EVALUATION 1.7 The evaluation has been carried out in two phases. Phase I consisted o f a review o f the portfolio o f World Bank extractive industry projects (referred to as the Portfolio Review hereaf- ter), supplemented by a review o f Country Assistance Strategies (CASs) and a literature survey.8 The Portfolio Review covered all 76 Bank-supported projects in the E1 sectors that were ap- proved since fiscal 1993 -48 “closed” or completed projects, and 28 “active” or ongoing pro- . ~ l i s t o f projects reviewed i s in Annex A. j e c t ~The 1.8 Phase I1built upon the findings from Phase Iand consisted o f ” 0 Three Thematic Studies o f the Bank’s E1portfolio: (i) revenue management, (ii) safe- guards implementation, and ( iii) governance (referred to hereafter as the Revenue Study, Safeguards Study, and Governance Study, respectively) 0 Five Country Case Studies (CCS) for Ecuador, Equatorial Guinea, Ghana, Kazakhstan, and Papua New Guinea (PNG)” 0 Seven recent Project Performance Assessment Reports (PPARs) 0 T w o Surveys: (i)o f task managers o f active E1 and EI-related projects and Country Economists o f resource-abundant countries;’2 and (ii) o f participants o f the EIR’s Re- gional Stakeholder Workshops.I3 STRUCTUREOFTHEREPORT 1.9 Following this introduction, Chapter 2 outlines the evolution o f Bank involvement inthe E1 sectors and characterizes the E1portfolio and i t s performance. Chapter 3 reviews the eco- nomic benefits o f Bank projects. Chapter 4 assesses the extent to which the Bank’s portfolio im- plemented i t s environmental and social safeguard policies and addressed issues o f environmental capacity building and mine closure. Chapter 5 discusses the Bank’s efforts to improve the gen- ~~ 8. The Approach Paper and other supporting documents for t h i s evaluation study are available o n the Internet (www.ifc.org/oeg/EIEvaluatiodeievaluation. html). 9. The portfolio o f projects chosen for review by this study consists o f all extractive industries projects approved during or after FY 1993, the fxst full financial year after the WBG adopted revised safeguard policies. A total o f 76 projects were reviewed, comprising 48 completed (oil & gas: 24; mining: 24) and 28 active projects (oil & gas: 15; mining: 13). Detailed discussion and statistical tables o n the main characteristics o f the project portfolio are provided inthe back- ground paper “Review o f the Portfolio o f W o r l d Bank Extractive Industry Projects.” 10. See Annex D for the complete l i s t o f background papers. 11. The five countries were chosen based o n the relative importance o f extractive industries in their economies, the intensity o f B a n k assistance they received, and for regional diversity. 12. The s t a f f survey questionnaire was sent to 95 WBG staff involved in extractive industries projects and countries (WB: 51, IFC: 33, MIGA: 12) and responses were received from 69% (WB: 51%, IFC: 91%, MIGA: 83%). 13. The stakeholder survey questionnaire was distributed t o 292 participants o f the EIR’s LAC, ECA, and AFR re- gional stakeholder workshops, and the response rate has been 26% (Rio: 25%; Budapest: 30%; Maputo: 24%). The EIR designed the regional workshops to be representative o f WBG stakeholders. The participants represented gov- ernments: 25%, industry: 2 1%, c i v i l society: 30%, the WBG: 11%, and Others (academia, other multilateral organi- zations etc.): 13%. Survey respondents represented government: 41%, industry: 21%, civil society: 25%, the WBG: 4%, and others: 9%. 5 eration, management, and utilization of fiscal revenues fiom resource extraction. Chapter 6 re- views the Bank’s approach to governance issues in EI-dependent countries. Chapter 7 presents the recommendations. 6 2. World Bank’s E1 Role and Portfolio 2.1 The W o r l d Bank’s role in extractive industries has evolved from mainly supporting ex- ploration and production activities (1960s to the early 1 9 8 0 ~to ) ~sector policy reform and com- mercialization o f state-owned enterprises (1980~)~ and to a greater emphasis o n capacitybuilding and private sector development (1990s). Also in the 1990s, the Bank began to assist transition economies to maintain production levels, rehabilitate or close uneconomical facilities, and attract foreign equity to their extractive industries sectors. Since the mid-1990s, the Bank’s approach to extractive industries has been evolving toward addressing social, environmental, mine closure, revenue management, and sustainable development issues in a more holistic manner. I t has also increased its collaboration with c i v i l society, local governments, and the private sector. 2.2 The Bank’s E1portfolio from the 1980sto the present illustrates the most recent shifts in its role. Between the 1980s and the 1990s, the Bank’s overall lending to the E1sector decreased marginally in absolute terms and significantly relative to the Bank’s overall lending. Lending for o i l and gas fell considerably, while lending for mining rose sharply. Over the same period, the quality o f E1project outcomes has been better than for the Bank as a whole, while the mining sector improved over the o i l & gas sector during the 1990s. EVOLVING THEBANK’S POLICY AND ROLE I N THE EXTRACTIVE INDUSTRIES 2.3 1960s to the early 1980s: Duringthis period, the Bank assisted public sector investment efforts to enhance productive capacity inboth the o i l & gas and mining sectors. This trend accel- erated in the o i l & gas sector when the Bank established an Energy Department inpart to support lending for o i l & gas operations after the second o i l shock o f 1979. Specifically, the Bank estab- lished a program to attract private financing into o i l & gas exploration in countries that lacked resources to develop national petroleum industries. 2.4 1980s: The Bank shifted i t s focus in the 1980s toward supporting sector policy reform and the commercialization o f state-owned enterprises (SOEs). Later in the decade the Bankpur- sued sector reform and liberalization and developed a framework for private investment, leading to active promotion o f private investment, such as for developing exploration data. In 1984, the Bank issued policy guidelines for o i l & gas (OMS 3.82).14 2.5 The guidelines under OMS 3.82 provided for the Bank to assist borrower countries to (a) design and implement effective energy policies; (b) design and implement effective investment plans and sound policies for exploration, development, and use o f petroleum; (c) mobilize the domestic and external financial resources required; and (d) develop local capacity to conduct pe- troleum operations and to provide petroleum service efficiently and competitively. The guide- lines also suggested that the Bank promote exploration only where n o significant exploration was taking place. 2.6 Early 1990s: Inkeeping with OMS 3.82, in the 1990s, the Bank supportedprivateprovi- sion o f services in the extractive industries, and encouraged new direct private investment. This 14. World Bank 1984. 7 trend was strengthened as Central and Eastem European countries began their transition in the early 1990s. The Bank supported this shift by providing technical assistance and advisory ser- vices for the modification o f legislative, institutional, and taxation regimes to accommodate and attract foreign equity investment in the extractive industries. The Bank’s attention more explic- itly shifted to creating an enabling environment for the private sector (thus changing the role o f the government from owner-operator to regulator), privatization, mine closure, and industry re- structuring as outlined in the 1992 Africa Technical Department Paper, Strategyfor African Min- ing. l5Thus, as countries moved from public to private ownership and extractive resource exploi- tation, the Bank moved away from direct lending for production-related projects, and shifted much o f i t s effort to supporting initiatives that would bolster private sector growth. 2.7 The late 1980s and early 1990s also witnessedrisingpublic concern about environmental degradation and social inequity. A Bank Operational Directive o n environmental assessment (OD 4.01) was issued in 1989 and revised as a more comprehensive policy for environmental and social impacts, adopted in 1991, This was converted to Operational Policy (OP) 4.01 in 1999 which covers all projects except for structural adjustment loans. 2.8 Operational Policy 4.01 i s particularly important for the E1sectors due to their potential for negative environmental and social impacts. The objective o f the policy i s to ensure that pro- jects are environmentally and socially sustainable by preventing, mitigating, or compensating for potential adverse impacts. Under the policy, the environmental assessment o f projects should take into account the natural environment (air, water, and land); human health and safety; social aspects (involuntary settlement, indigenous peoples, and cultural property); and transboundary and global environmental impacts. 2.9 The formulation and implementation o f safeguard policies, which have been widely ac- cepted and emulated outside the Bank, illustrates how the Bank can play a convening role and have influence beyond the implementation o f projects (see B o x 2.1). 2.10 Mid- and Late-1 990s: The mid-1990s saw the Bank take a more inclusive approach to i t s developmental operations and begin to emphasize the need for external partnerships connecting government, the private sector, and c i v i l society inthe design and implementation o f socially and environmentally sensitive projects. In the latter part o f the 1990s, there was an increased focus o n reform and deregulation programs in an effort to Mher good governance as a central element in the improvement o f country economic performance. In 1998, growing management concem about environmental and social impacts led to the creation o f the Bank’s safeguards policy framework, which combined the environmental assessment policy with nine other “do no harm” policies.’6 This was followed by the establishment o f an enhanced safeguards compliance system in 1999, a concerted effort to implement the policies, which had previously been more flexibly interpreted as “guidelines.” 15. W o r l d Bank 1992. 16. The Bank has 10 safeguard policies: 8 deal with environmental and social concerns (OPBP 4.01, Environmental Assessment: OPBP 4.04, Natural Habitats; OP 4.09; Pest Management; OPBP 4.12, Involuntary Resettlement; OD 4.20, Indigenous Peoples; OP 4.36, Forestry; OPBP 4.37, Safe@ ofDams; and OPN 11.03, Cultural Property) and 2 deal with legal matters (OPBP 7.50, Projects on International Waterways,and OPBP 7.60, Projects in DisputedAreas. 8 Box 2.1: Channeling the Bank's Convening Power for Sustainable Development o f the Extractive Industries Sectors The Bank, often in collaboration with other organizations, has helped bringtogether various stakeholders in the extractive industries sectors to address issues at the national, regional, and global levels. This con- vening power i s prized because the Bank has access to all stakeholders, broad development experience, and ongoing involvement with project investments and technical assistance in the sector. nthe o i l & gas sector, the Bank has collaborated with the Government o f Norway in a major Global Gas I Flaring Reduction Initiative,awhich was the subject o f a 2002 conference inOslo that hostedrepresentatives o f industry, government, the research community, and NGOs. An international training program, Good Governance in a Global Economy -Oil and Gas Policy and Regulation, heldinCalgary, Canada, Septem- ber 2002 in collaboration with the Canadian Petroleum Institute and the IFC, again brought together senior government and industryrepresentatives. nthe mining sector the Bank co-sponsored with the Government o f Papua N e w Guinea the Conference on I Mining and the Communityfor Asian and Pacijk Nations in Madang, in September o f 2002. The event, in which other Asian mining countries took part, i s widely seen as having had an important impact on the awareness o f social and community issues inPapua N e w Guinea and inthe region. A similar event, Mining and the Community, was held for Latin American nations in Quito, Ecuador, in 1998. I n M a y 1995, the Bank hosted in Washington an International Roundtable on Artisanal Mining that brought together repre- sentatives from different parts o f the world. InMarch 2001, the Bank launched the Communities and Small- ScaleMiningInitiativebalong with other multilateral institutions, to improve coordination betweenminers, communities, donors, governments, and other stakeholders. Another significant event was a roundtable fo- cused on foreign investment and mining development inWestem China. The conference, Attracting Private Mining Investment,was organized jointly with the A S E A N Federation o f MiningAssociations, the Malay- sian Chamber o f Mines and the Metal MiningAgency o f Japan and met inUrumqi, China, inOctober 2000. a. For details see http://www.worldbank.org/ogmc/global-gas.htm b. F o r details see www.casmsite.org. Source: World Bank 2.1 1 New priorities began to emerge for sustainable mining, regional and local economic de- velopment through private investment inmining, and community development. The evolution in the Bank's mining strategy was presented in two World Bank Technical Papers, World Bank Group Assistance for Minerals Sector Development and Reform in Member Countries" and A M i n i n g Strategyfor Latin America and the Caribbean.l 8 The new priorities were documented in various partnerships,publications, conferences, and workshops on community issues, mine clo- sure, revenue management, and sustainable development supported by the World Bank Mining Division between 1997 and 2002. 2.12 Inthe late 1990s, it became clear that despite efforts to coordinate over the years, IFC and the Bank have not capitalized enoughon synergies between transactions andpolicy work. To more closely integrate WBG activities and advisory work in the extractive industries, the o i l & gas and mining units o f the Bank and IFC were reconstituted as joint Bank-IFC Global Product Groups. 17. Onorato, Fox and Strongman 1998. 18. V a n Der Veen et al. 1996. 9 2.13 Energy Business Renewal Strategy, 2001: The most recent re-thinking o f the Bank’s role in the energy sector i s reflected in the Energy Business Renewal Strategy (EBRS), which was presented to the Board in 2001. The EBRS recognizes a declining demand for traditional IBRD/IDA products in the energy sector and shifts the focus to the WBG’s priorities -includ- ing poverty alleviation -and comparative advantages: addressing poverty, macro-governance, and the environment; supporting reform and regulation to help support competitive energy mar- kets; facilitating the transfer o f knowledge among developing countries; and catalyzing invest- ment in non-investmentrated countries. The EBRS aims to facilitate access to modern fbels, cre- ate objective and transparent regulatory mechanisms, and catalyze private investments. I t continues the Bank’s emphasis on closing loss-making mines and o i l refineries; promoting clean transport h e l s and switching from coal to gas; and facilitating environmentally sustainable ex- ploration, production, and distribution o f oil, gas, and coal. Reducing gas flaring and facilitating carbon trading and joint investments to reduce greenhouse gas (GHG) emissions are also priori- ties under the new strategy (see Box 2.2). Box 2.2: Climate Change: The WBG’s Approach I t i s increasingly recognized that the adverse effects o f climate change, especially through burningo f fos- s i l fuels, can produce changes in precipitation patterns and rise in sea levels that can potentially pose ma- j o r developmental challenges for developing nations. Hence, the WBG supports its client countries in (a) mitigating the adverse impacts o f climate change, (b) reducing vulnerability and improving adaptation, and (c) building capacity for both a and b. Successful support requires policy dialogue, integrated plan- ning and generation, and dissemination o f knowledge backed by investment lending. The WBG’s approach to mitigating the effects o f and vulnerability to climate change i s laid out in Fuel for Thought (World Bank 2000), which highlightsappropriate policy for improving energy efficiency and the use o f clean technologies and fuels. Further, the WBG seeks to leverage external resources, particu- larly the Global Environment Facility (GEF), as well as new instruments such as the Prototype Carbon Fund, Community Development Carbon Fund, Bio-Carbon Fund, and private sector resources within the framework o f the Kyoto Protocol. Interms o f capacity building the WBG helps clients through methodo- logical, technical, and investment work to develop market mechanisms, sectoral and national plans, and international cooperation. Source: World Bank OVERVIEW OF THE 1980s AND 1990s PROJECTS 2.14 Lendingfor oil & gas decreased while mining increased: Between the 1980s and 1990s’ the overall amount o f Bank lendingto the E1sectors declined by 6 percent (Figure 2.1). However, this overall decline masks a difference between the two sectors: lending for the oil & gas sector fell by 34 percent, while it rose sharply by 63 percent for the mining sector. Duringthe same period the E1sectors’ share o f the Bank’s entire portfolio declined from 4 percent o f lending to 2 percent. 2.15 Outcome: Overall E1project ratings were higher than the Bank-wide average during the 1980s and 1990s, though they f e l l somewhat for o i l & gas and rose sharply for mining 19. The outcome rating denotes the extent to w h i c h the project’s major relevant objectives were achieved, or are expected to be achieved, efficiently. 10 Figure 2.1: Increased Lending to Mining Has Figure 2.2: Quality of WB Lending for El Been More than Offset by Decreased Lending Projects to Oil and Gas ,- % 22 100 Total El Oil & Gas Mining Total El Oil & Gas Mining Figure 2.3: Institutional Development Impact Figure 2.4: Sustainability of El Project of El Projects Outcomes - b 100 I 2 C 80 H 1980s I Total El Oil & Gas Mining Total El Oil & Gas Mining projects. E1projects with outcomes rated “moderately satisfactory” or better rose slightly (77 percent to 78 percent). The percentage dropped for o i l & gas projects (84 percent to 71 percent), and rose significantly for mining projects (55 percent to 86 percent). Taken together, these out- comes are better than for the Bank as a whole, for which the comparable ratios rose from 65 per- cent in the 1980s to 75 percent in the 1990s. 2.16 Institutional DevelopmentImpact: The institutional development impact2’ for all E1pro- jects improved between the 1980s and 1990s, declined somewhat for o i l & gas, and rose appre- ciably for mining projects. The institutional development impact o f all E1projects -interms o f percentage o f projects that were rated “substantial” or better -rose from 38 percent to 50 per- cent between 1 9 8 0 and ~~~ 1990s. The o i l & gas sector saw moderate decline (43 percent to 38 percent), while the mining sector showed considerable improvement (24 percent to 64 percent) over the same period. Taken together, these ratings are higher than the average for all Bank pro- jects, which rose from 30 percent in the 1980s to 43 percent in the 1990s. 2.17 Sustainability: The sustainability” o f project benefits saw very large gains inboth the o i l & gas and mining sectors. The sustainability o f outcomes -in terms o f the percentage o f pro- jects for which the rating was “likely” or better -improved from 39 percent to 72 percent for all E1projects between the 1980s and 1990s with gains in both o i l & gas (44 percent to 75 percent) 20. The institutional development impact denotes the extent t o w h i c h a project improved the ability o f a country or region to make more efficient, equitable, and sustainable use o f i t s human, financial, and natural resources. 21, F o r projects completed during 1980-86 only 53 percent were rated for institutional development impact under the older performance ratings. They are therefore excluded f r o m this comparison. 22. The sustainability rating denotes the resilience t o risk o f the project’s net benefit flows over time. 11 and mining (28 percent to 68 percent). Overall, these ratings improved at a much faster rate than the Bank-wide average, which rose from 44 percent in the 1 9 8 0 to ~~56 percent in the 1990s. HIGHLIGHTS OF THE PORTFOLIO OF PROJECTS UNDER REVIEW: FY93-FY02 2.18 The Portfolio Review covered all 76 E1 projectsz3approved during the period fiscal 1993-2002. This portfolio consists o f 48 completed projects (oil & gas: 24; mining: 24) and 28 active projects (oil & gas: 15; mining: 13). This section describes the main characteristics o f this portfolio. 24 2.19 The transitional economies o f the Europe and Central Asia Region accountedfor the largest share of lending: For completedprojects in both o i l & gas and mining sectors, the Europe and Central Asia (ECA) region received the major share o f lending (Figure 2.5). The East Asia and Pacific (EM) region accounted for the next largest share o f o i l & gas lending and Latin America and the Caribbean (LAC) with the next largest share o f mining lending. Figure 2.5: The Europe and Central Asia Region Accounted for the Largest Share of Lending in Both Sectors I Percentage of Actual Lending FY1993-02: Oil & Gas Percentage of Actual Lending FY1993-02: Mining 20 l2 9 10 0 0 AFR EAP ECA MNA LAC SAS AFR EAP ECA MNA LAC SAS 2.20 The most common project objectives reflected some o f the similarities between the two sectors: Analysis o f the objectives (each project could have more than one) ofthe projects identi- fied a few similarities and many differences between the two sectors. Among the similarities, for both o i l & gas and mining projects, institutional development, PSD, and environmental man- agement were among the leading objectives. 2.21 But the remainingobjectives tended to differ across the two sectors and betweencom- pleted (older) and ongoing (more recent) projects. For completed o i l & gas projects the next most frequent objectives included pipeline construction, policy reform, production, and social obj ec- tives in that order. For active projects, the other objectives were production, pipeline construc- tion, and social issues in descending order. For completed mining projects, other objectives in decreasing frequency were rehabilitatiodclosure o f mines, social issues, production, and ar- 23. For this review, the E1portfolio includes projects that are not primarily classified under the o i l & gas or mining sector headings o f the Bank’s classification system but nevertheless contain significant EI-related components. 24. A more detailed discussion o n the Bank’s changing role, portfolio objectives, and quality o f lending for the ex- tractive industries i s the “Review o f the Portfolio o f W o r l d Bank Extractive Industry Projects.” 12 tisanal and small-scale mining (ASM). For active mining projects, the other objectives were so- cial issues and policy reform -production did not figure at all. 2.22 The importance o f the environmental assessment policy i s apparent in the high per- centage o f projects in categories A and B: Among o i l & gas projects, approximately 33 per- cent o f all active and completed projects came under Category AZ5o f the Bank’s environmental assessment policy (OD/OP 4.01). For Category B the corresponding percentages were 25 and 13. For mining projects, only 20 percent o f the completed projects and none o f the active projects came under Category A. In addition, 50 percent o f completed and 30 percent o f active mining projects came under Category B. 2.23 Project performance ratings have been better than average: The Bank’s portfolio o f completed E1projects has generally performed well in all three categories used by OED: outcome, sustainability, and institutional development impact.26O f the completed oil & gas projects, out- come was rated “moderately satisfactory” or better for 71 percent, sustainability was rated “likely” or better for 73 percent, and institutional development impact was rated “substantial” or better for 37 percent. O f the completed miningprojects, outcome was rated “moderately satisfactory” or bet- ter for 86 percent, sustainability was rated “likely” or better for 68 percent, and institutional devel- opment impact was rated “substantial” or better for 64 percent o f the projects. 2.24 The portfolio o f active projects has also been performing well according to supervision reports. All active o i l & gas projects had development outcome ratings o f “satisfactory” or bet- ter, and no adverse issues were reported regarding compliance with the Bank’s safeguard poli- cies. All active mining projects had ongoing development outcome ratings o f “satisfactory” or better, and only one project reported less than satisfactory compliance with aprovisionunder the Bank’s safeguards policies. It should be noted however, that these self-assessments o f active pro- jects have not been validated by OED. 25. Under WB’s OP 4.01 for Environmental Assessment, Category A projects are those that are l i k e l y t o have ad- verse environmental and social impacts that are sensitive, diverse, o r unprecedented; Category B projects are those with adverse impacts o n human populations o r environmentally important areas; Category C i s a residual category. 26. See Annex C for an explanation o f OED’s project ratings scale. 13 3. Economic Benefits from Bank Projects 3.1 Extractive industries have the potential to make a major contribution to the development o f resource abundant countries by transforming their mineral wealth into sustainable develop- ment. Thus, the rationale for Bank projects i s based on the expectation that they will support the country’ development goals, and this expectation i s underpinned by an economic appraisal in- tended to ensure that the objectives have been appropriately chosen and that the project i s the least-cost way o f attaining the stated objective^.^' The discounted present value o f the net bene- f i t s (NPV), the economic rate o f return (ERR), or where the benefits cannot be measured in monetary terms, a cost-effectiveness criterion are the indicators o f choice for making this deter- mination. Following completion o f the project, an ex-post recalculation o f the economic rate o f returnor the cost-effectiveness criterion i s expected to determine whether the project produced the expected benefits in an efficient manner.28 This Chapter discusses the available information on the extent and sources o f the economic benefits drawing from the Portfolio Review o f the Bank’s extractive industries projects. BENEFITS REPORTING OF ECONOMIC 3.2 The Implementation Completion Reports (ICRs) are an integral part ofthe Bank’s knowl- edge management and accountability reporting system, and are intended to document and evaluate the outcomes and impacts ofthe project, including their economic benefits. As summarized in Ta- ble 3.1, the Portfolio Review found that, out o f the 44 completed projects, ICRs o f 17 (mostly in- vestment loans) had re-estimates o f ERRS andNPVs, and an additional 13 ICRs (mostly o f techni- cal assistance and sectoral adjustment loans) featured at least some ex-post quantification and valuation o f the benefits.’’ This i s consistent with the relative simplicity o f attributing and quantify- ing the costs and benefits ofinvestment projects compared to other types ofprojects. Nevertheless, given the issues that have beenraised about the economic contribution o f extractive industries pro- jects, a greater effort to increase the documentation and analysis o f economic benefits would be desirable, including a cost-effectiveness assessment where an ERR i s not feasible, in line with the Guidelines for Preparing ICRS.~’ 3.3 For the Specific Investment Loans (SILs), the benefits derived mainly from increased production, increased private investment, and improved productivity. Out o f 20 SILs3’ in the portfolio, 18 had an ERR or NPV estimated at appraisal, o f which 16 were re-estimated at com- pletion. While i t is comforting to note that, in 15 out o f these 16 cases, the returns were greater 27. That is, whether the project creates more net benefits to the economy than other mutually exclusive options. See OP 10.04: Economic Analysis o f Investment Operations, World Bank, September 1994. 28. See OP 13.55: Implementation Completion Reporting, World Bank, July 1999. 29. The four completed structural adjustment loans in the sample were excluded fiomthis analysis given the Bank’s practice o f not estimating ERRSor quantifying benefits for such projects. 30. Guidelines for Preparing Implementation Completion Reports, World Bank, 1999. The earlier Bank policy o n Project Completion Reports also required the preparation o f an ex-post economic analysis. 3 1. This figure includes one Emergency Recovery Loan. 14 than 10 percentY3’i t would also have been feasible to have reported ex-post analyses for three o f the remaining S I L S . ~ ~ Table 3.1 : Economic Evaluation in Implementation Completion Reports Instrument ERR/NPV/least- ERR/NPV/least- Quantification Quantification Monetary Monetary (number)a cost analysis cost analysis of benefits done in ICR? value of value conducted at reported in ICR feasible? benefits provided in appraisal feasible? ICR? Yes/No/Partly Yes/No/Partly Yes/No/Partly Yes/No/Partly SlLs (20) 18 16 201-1- 171-13 201-l- 151213 TALs (1 5) 3b 1 41417 31913 61217 31814 SECALs (9) 71111 51311 61112 6131- Total (44) 21 17 3 11518 2511 317 321319 2411 317 a. SlLs include one emergency rehabilitationloan (ERL); TALs include one GEF project; SECALs include one rehabilita- tion investment loan (RIM) b. The Equatorial Guinea Petroleum TA project estimated an FRR and the Azerbaijan Petroleum TA 3.4 The 15 Technical Assistance Loans ( T A L s ) in ~~ the portfolio were associated with quanti- fiable and valuable benefits such as increased private investment, increased gas sales, increased o i l and minerals production, increased fiscal revenues, improved environmental conditions, im- proved sector efficiency, as well as benefits that are more difficult to quantify, such as improved legal and regulatory frameworks and institutions, and preparatory studies for future projects. O f the 15 TALs, one had a re-estimated ERR3’and 7 ICRs provided at least some indication o f the monetary value o f the benefits. Since some benefits were amenable to monetary valuation in 12 o f these projects, more could have been done to document their cost-effectiveness and highlight their economic contributions. 3.5 All 9 completed Sectoral Adjustment Loans ( S E C A L S ) were ~ ~ in the mining sector and were associated with increased or decreased production o f minerals (coal, in most cases), re- duced government subsidies, cleaner environment, increased operational efficiency, improved profitability, and increased private investment. Six o f the ICRs provide some data on these achievements, from which a judgment can be made about the efficiency o f the projects. The other three ICRs did not provide any quantitative information on results. ECONOMIC BENEFITSFROM PRIVATE SECTOR DEVELOPMENT (PSD) 3.6 World Bank efforts to promote privatization andboost private investment had largelyposi- tive outcomes. Eleven out o f 16 completed projects with private sector development (PSD) com- 32. That is, a proxy for the opportunity cost of capital. 33. The fourth remaining SIL, Ethiopia’s Calub Energy Project, was closed prematurely, precluding any meaningful ex-post economic analysis. 34. This figure includes one GEF grant. 35. The ERR for the Guinea Mining Sector Investment Promotion Project was estimated for the appraisal and re- estimated for the ICR. 36. This figure includes one Rehabilitation Investment Loan. 15 ponents yielded o r promised to y i e l d significant benefits by l a y i n g the groundwork f o r i m p r o v i n g the efficiency o f public enterprises through commercialization, privatization, and increasing E1ac- tivity by attracting private investment. 3.7 Privatization was politically complex in a l l cases. Wherever progress was made it was largely due t o strong government commitment, supplemented by f l e x i b i l i t y on part o f the Bank. T h i s i s evident inBolivia’s Regulatory R e f o r m and Capitalization and Hydrocarbon Sector R e f o r m projects as w e l l as in Peru’s Privatization Adjustment L o a n and E n e r g y M i n i n g projects. Privatiza- tion o f coal mines inRussia was a highly complex task carried out in a difficult political and indus- trial relations environment, and might not have been possible without strong govemment commit- m e n t and efforts at consulting important stakeholders, together with Bank f l e x i b i l i t y inthe design and implementation o f the projects. On the other hand, inadequate government commitment and political consensus, apart fi-omissues o f evolving sector strategy and commercial viability, appears to b e behind the l i m i t e d progress o f privatization in Poland’s Hard C o a l SECAL I and I1projects. T h e s l o w progress in privatizing Zambia Consolidated Copper M i n e s can b e largely attributed t o unfavorable market conditions for copper and political interference in the process. 3.8 A particularly effective form o f PSD intervention was attracting increased private in- vestment -such as in the mining sectors o f Guinea and Tanzania -through relatively low-cost technical assistance (TA) interventions (see Box 3.1). B o x 3.1: Experience w i t h Private Sector Development in the Extractive Industries Sectors The Bank’s efforts at commercialization, privatization, and improving the climate for private investment yielded largely positive returns interms o f increased investments and exports and reduced burden on state budgets. These efforts generally involved Technical Assistance Loans (TALs) that were relatively smaller than investment and adjustment loans. The positive results were associated with strong government com- mitment, the prior establishment o f an appropriate legal and regulatory framework, and flexibility o n the part o f the Bank. However, even where earnest efforts were made, volatile commodity prices andmacro- economic crises adversely affected some o f the outcomes. Armed with a strong mandate for privatization, Bolivia moved ahead quickly with the sale o f three state- owned hydrocarbon enterprises that yielded US$828 million and improved prospects for investment o f up to US$2 billion during 1998-2000. Strong government commitment was also evident in Peru where the hydrocarbon sector was opened to private investment. Despite strong political and labor opposition, Rus- sia achieved a major feat o f privatizing 77 percent o f coal assets by 2001, helping decrease subsidies by 40 percent. The success o f Tanzania and Guinea in attracting high levels o f private investment to their mining sectors was aided by a relatively integrated approach to developing an enabling legal, regulatory, and fiscal framework. Tanzania’s mineral exports grew f r o m US$15 million to US$3 12 m i l l i o n over 1992-2001, while in Guinea mineral exports rose f r o m US$400 million to US$500 during 1996-2001. Argentina’s MiningDevelopment TALs made a good beginningin improving the institutional framework for privatizationbut the economic crisis in 2002 has diminished i t s immediate impact. Little headway was made in Zambia o n privatizing the dominant Zambia Consolidated Copper Mines due to a volatile market for copper and stakeholder disagreements. The overall efficacy o f the World Bank’s interventions in Ghana’s mining sector duringthe 1990s i s judged to be substantial because o f the success in attracting pri- vate capital and strengthening sector management capabilities, particularly o f the Minerals Commission. 16 Box 3.1 (continued) In Ecuador, a new MiningL a w passed in 199 1 and amended in2000 includedmuch-improvedprovisions to attract private sector investment and helped develop a regulatory framework close to best practice. But the country’s political instability and unreliable judicial system acted as disincentives, which were com- pounded by the negative effect o f falling international commodity prices. Finally, Kazakhstan’s Petroleum TA project was successful in improving the capacity o f key petroleum sector agencies to attract foreign investment. It financed the continuation o f technical, financial, and legal advisory services that were critical to the conclusion o f two major Caspian Sea projects. On the negative side, the effort to privatize Uzenmunaigas, the country’s largest state-owned producing enterprises, and a centerpiece o f the Bank-funded TA program, did not make much headway. On the other hand, the Bank also helped reform in a broad range o f sector policy issues covering petroleum legislation and taxation, pricing, and privatization o f retail petroleum trade. Source: World Bank BENEFITS ECONOMIC FROM MINECLOSURE OR REHABILITATION 3.9 Over 60 percent o f completed mining projects, including six completed SECALs in Po- land, Russia, and Ukraine, involved large-scale rehabilitation andor closure o f uneconomical coal mines. On a smaller scale, 15 small copper mines and 66 chrome mines were successfully closed o r privatized in Albania. The economic benefits from such projects derive mainly from the reduced burden on government budgets (see Box 3.2). Box 3.2: Economic Benefits o f Rehabilitation/Closure o f Uneconomical Mines The economic benefits from closure o f uneconomic mines mainly derive from reducing the burden on government budgets through lowered or eliminated subsidies, reduced waste o f resources, the freeing up o f labor that can be used more productively elsewhere in the economy, and improved climate for privati- zation and competition contributing to overall efficiency. The experience was positive in this respect in Poland, Russia, and Ukraine. The Poland Hard Coal SECAL I and I1projects reduced excess coal production capacity by 23 percent to 105 million tons per year (mtpy) and employment by 36 percent to 155,000 between 1997/98 and end-2001. In Poland, the coal industry’s financial performance improved from a loss o f US$l.O billion in 1998 to a profit o f US$43.3 million by 2001 (At an exchange rate ofUS$1=0.2545 PLN). Under Ukraine’s Coal Pilot and Coal SECAL projects, over 25 percent o f Ukraine’s coal mines were closed and the efficiency o f the re- maining mines was increased 85 percent between 1998 and 2000. The coal production workforce was reduced by 24 percent between 1995 and 1999, while production dropped by only 3 percent. Subsidies for loss-making coal mines were halved, from US$500 million in 1996 t o US$250 m i l l i o n in 1999. As o f 200 1, Russia’s Coal S E C A L Iand I1led to the closure o f 183 heavily loss-making mines o f which 158 completed substantive closure works. As a result o f these projects, budgetary subsidies for the coal sector were reduced from 1.05 percent o f GDP in 1993 to 0.07 percent o f GDP by 2001. Inboth Russia and Ukraine, Bank support not only helped reduce subsidies, but also shifted the composi- tion o f subsidies away from operating expenses toward social mitigation, mine closure, and environ- mental cleanup. Source: World Bank 17 3.10 Rehabilitation and closure o f coal mines in Russia was a major task, as already noted (para. 3 .6), but government commitment, stakeholder consultation, and Bank flexibility contrib- uted to the positive results. InUkraine, favorable results were obtained under relatively less dif- ficult conditions. The strategy o f approaching Ukraine’s rehabilitation/ closure process cau- tiously, starting with the smaller-scale Ukraine Coal Pilot project and leveraging i t s success for the larger Ukraine SECAL appears to have worked well. A notable feature o f Poland’s Hard Coal SECALs I and I1was that they succeeded in reducing uneconomical production levels and excess employment, while keeping a tense situation from exploding. 3.1 1 However, in all three countries, Russia, Ukraine, and Poland, attempts at generating al- temative employment for laid-off workers in other sectors remained an important issue, although there was progress, for instance, in resolving the employment problem in Russia as the economy began to recover from the crisis o f 1998. This may imply that adequate attention to the demand- ing task o f generating altemative employment should be the focus o f projects outside o f the ex- tractive industries sectors. ECONOMIC BENEFITSFROM ENVIRONMENTAL CLEAN-UP AND MITIGATION 3.12 Most o f the projects in the E1portfolio had environmental components o f varying magni- tude and importance. Some dealt with cleanup o f existing environmental conditions and others were concerned with mitigating the environmental effects o f new operations under the project or related projects. Only a few projects - five completed and three active - focused mainly on dealing with existing or ongoing environmental problems. These projects were expected to yield economic benefits through healthier living conditions, greater resources for productive activities, and improved productivity o f resources, through reclamation o f land and improving air, water, and soil quality. 3.13 Five completed projects, in Brazil, Ecuador, India, Russia, and Thailand, focused on technical assistance for addressing environmental impacts o f past or ongoing extractive indus- tries activities. While the outcome was broadly satisfactory in India (strategy for managing coal mine fires in Jharia coalfields), Brazil (reclaiming degraded mining areas and constructing tail- ings ponds through the Environmental Conservation and Rehabilitation project), and Thailand (converting to unleaded fuel production in Bangchak refinery) project. 3.14 In the case o f the recently completed Coal Sector Environmental and Social Mitigation Project (CSESMP) in India, an Inspection Panel (IP) investigation found i t to be out o f compli- ance with some safeguards provisions. Notwithstanding the lack o f compliance, the project re- sulted in considerable improvement in Coal India’s approach to social and environmental mitiga- tion. The O i l Spill Contingency project for the Westem Indian Ocean Islands o f Comoros, Madagascar, Mauritius, and Seychelles seeks to build their capacity for complying with related intemational conventions and protocols. 3.15 Among the projects that were not exclusively focused on environmental issues but con- tained significant environmental components, the Bolivia-Brazil gas pipeline project contained provisions for stakeholder consultation and community participation that gave credibility to en- vironmental initiatives and improved the chances o f their success. Bolivia-Brazil’s experience thus stood in contrast to the Ecuador and India projects in this respect. Another feature worth noting i s that while many projects in the portfolio contained significant environmental compo- 18 nents, almost none o f them explicitly factored the environmental benefits into their economic cost-benefit analysis. A notable exception was Bolivia-Brazil’s pipeline project, which applied an environmental premium for the displacement o f more polluting fuels by natural gas in i t s eco- nomic analysis. ECONOMIC BENEFITS OF ARTISANALAND SMALL-SCALE MINING 3.16 The rationale for the promotion o f artisanal and small-scale mining (ASM) needs to rest on i t s potential for poverty alleviation, through the creation and maintenance o f employment in a so- cially and in environmentally acceptable manner. Among the Bankproj ects reviewedinthis study, A S M issues were a significant component in three completed projects in Ecuador, Ghana, and Tanzania, and four active projects in Burkina Faso, Madagascar, Mozambique, and Zambia. The main approaches involve the improvement o f the legal frameworWformalization o f ASM activities, increasing tax revenues (Ecuador, Madagascar, Mozambique, Tanzania), improving production methods and technology and providing extension services (Burkina Faso, Ecuador, Ghana, M o - zambique, Tanzania), improving environmental awareness andmanagement (Burkina Faso, Ecua- dor, Ghana, Madagascar, Tanzania), improving capacity o f government to deal with ASM (Burk- ina Faso, Ecuador, Ghana, Madagascar, Tanzania, Zambia). Based on results to date, the main lesson i s to recognize A S M as a poverty-driven issue, and to move fkom using a narrow technical approach to a more integrated approach -ensuring an appropriate legal and fiscal fkamework, in- volving ASM communities in decision-making, and considering environmental and social aspects o f A S M at the project design stage (see Box 3.3, next page). CONCLUSIONS 3.17 Overall, 73 percent o f the ICRs o f completed extractive industries projects contained at least some ex-post quantification and valuation o f the benefits, but only 39 percent had a re- estimated ERR or NPV, and the rest do not discuss the cost effectiveness o f achieving the objec- ~’ t i v e ~ . Based on an evaluation o f the feasibility o f additional economic analysis, this share could have been raised to about 89 percent. While the project’s economic returns only constitute an intermediate outcome in the transformation o f mineral wealth into sustainable development, the adequate reporting and validation o f project benefits, in line with Bank policy, constitutes the basis for most further evaluation, and should be an essential component in the Bank’s account- ability reporting. Some improvement in this area would also help the Bank address the percep- tion that the economic benefits o f the projects may have been outweighed by adverse environ- mental and social impacts. 37. There i s n o reason to believe that the performance o f extractive industries projects in this regard i s different that that o f projects in other sectors. 19 Box 3.3: Artisanal and Small-Scale Mining Nearly 13 m i l l i o n people are involved in artisanal and small-scale mining (ASM) worldwide, with a high proportion o f women (10 to 45 percent) and children (5 to 30 percent) in several countries. A S M produc- tion accounts for 15-20 percent o f the value o f the world’s non-fuel mineral production -and as much as 90-1 00 percent in some countries. The majority o f earnings from ASM, especially artisanal miningare used for subsistence. Being largely in the informal sector (50 percent), artisanal and small-scale miners often have n o legal rights to mine, do not pay taxes, and are prone to exploitation by middlemen. In gen- eral, A S M i s characterized by poor standards o f safety and health, and greater environmental cost per unit o f output than large-scale mining activities. Developmental priorities for A S M are improving the legal and regulatory framework, investing revenues for sustained benefits, avoiding or mitigating negative environmental and social impacts, encouraging alternative economic activities, adopting a gender-sensitive approach, ending child labor, and ensuring good relationships between miners and other stakeholders. In Ghana, upon advice from the Bank, gold production by small-scale artisanal miners was legalized in 1989 by passage o f the Small-scale MiningLaw. The establishment o f legal purchasing arrangement ini- tially by a public and later by private buying agents offering world prices for gold and diamonds to ar- tisanal miners was the result o f active policy dialogue with the Bank. Ecuador’s MiningDevelopment and Environmental Control Project helpedto formalize most o f the coun- t r y ’ s A S M activities by granting title to 166 out o f 169 A S M associations that existed before 1995. This may have contributed to the absence o f land invasions by informal miners in the country inrecent years. Currently, 99 percent o f A S M enterprises in the country have presented environmental impact assess- ments (EIAs) or environmental management plans (EMPs) either individually or through associations. The project helped demonstrate the feasibility o f reducing ASM-related contamination, succeeded in promoting change to less-polluting processing technologies, and increased environmental health and safety awareness among miners and other stakeholders. Source: Mines and Minerals for Sustainable Development (MMSD) 2002; Country Case Studies; World Bank 3.18 Aside from the reporting issue, the main lesson that emerges i s that projects with satisfac- tory outcome ratings tended to b e associated with greater government commitment to project ob- jectives and adequate infrastructure (India Coal Sector Rehabilitation; Russia I and I1Oil Sector Rehabilitation; and Thailand Gas Transmission I and II),favorable commodity prices (Russia I and I1Oil Sector Rehabilitation), and a high level o f stakeholder involvement (Bolivia-Brazil pipeline and Bosnia-Herzegovina’s Natural Gas System Reconstructionprojects). T h e less successhl pro- jects appeared t o b e affected by p o o r government commitment (Ethiopia’s Calub Gas Develop- m e n t project), and unfavorable economic conditions or c o m m o d i t y prices (Korea Petroleum D i s - tribution and Sector Improvement project and Mongolia’s C o a l project). These lessons are broadly consistent with the Bank’s experience in other sectors. 20 4. Environmental and Social Impacts and Their Mitigation ADDRESSING ENVIRONMENTAL AND SOCIAL IMPACTS 4.1 The potential benefits from the extractive industries have often been undermined by adverse environmental and social impacts. Negative environmental impacts from o i l and gas activities can result from leakages and spills, flaring o f excess gas, and the opening o f access to new areas where settlement and deforestation can occur. Mining activities can be associatedwith deforestation, soil erosion, contamination o f surface and groundwater from toxic wastes, and mine tailings and coal mine fires. I naddition to the damage from ongoing projects, closed and abandoned projects have often l e f t a legacy o f clean-up costs that no one may be willing or able to pay.38 4.2 Negative social impacts can arise from the need to resettle local populations, including in- digenous peoples, or from disrupting traditional lifestyles to make way for extractive industries activities. Other social impacts can follow after resources are exhausted or have become uneco- nomical to extract, resulting in unemployment and scaled-down or abandoned infrastructure. O n the whole, social impacts tend to be more prominent for miningthan o i l & gas activities, given the higher employment generated at the local level and greater exposure to environmental, health, and safety hazards. 4.3 To mitigate the adverse environmental and social impacts o f the projects it supports, the World Bank has, over the past two decades, developed a comprehensive framework o f safeguard policies (see paras. 2.8-2.10). Their main objective i s to ensure that projects “do no harm,” that is, that they are environmentally and socially sustainable by ensuring that potential adverse impacts on the natural environment (air, water, and land); humanhealth and safety; social aspects (involun- tary settlement, indigenous peoples, and cultural property); and transboundary and global envi- ronmental impacts, are prevented, mitigated, or compensated. These policies define explicit re- quirements for the Bank to follow. Inlight o f the potential adverse impacts associatedwith oil, gas, and mining activities, the evaluation included a review o f the degree to which the Bank’s appraisal and implementation o f extractive industries projects have beenconsistent with these requirements (the “Safeguards Review”), whose findings are summarized in the first section o f this chapter. 4.4 Beyond achieving the objectives ofthe safeguards, an important aspect ofthe Bank’s ap- proach to development assistance involves the pursuit o f positive environmental and social goods, such as the remediation o f pre-existingconditions resulting from past mining and petro- leum activities (“legacy” issues), and the strengthening o f the policy and institutional framework to promote the implementation o f safeguards across the entire economy. M a n y extractive indus- tries projects have such components to “do good,” and their experience i s also discussed. 38. The M a y 15,2002, Toronto Declaration o f the International Council o f Mining and Metals states (on behalf o f the mining industry): “orphan site legacy issues are important and complex. However, they are beyond the capacity o f I C M M to resolve. Governments and international agencies should assume the lead role in addressing them.” 21 CONSISTENCY WITH OBJECTIVES OF THE SAFEGUARDS: “DO N O HARM” 4.5 The Safeguards Review focused on assessing theprojects’ degree o f consistency with the objectives o f the safeguard policies inthree areas: at approval, during implementation, and inthe adequacy o f Bank supervision inputs and reporting. Desk reviews were carried out on a sample o f 38 projects drawn from the portfolio o f 76 closed and active extractive industries projects ap- proved during or after fiscal 1993.39 The sample was purposively chosen to include projects that were likely to have adverse environmental or social impacts, and included 19 o i l & gas and 19 ~ ’ terms o f the categorization o f projects under the Bank’s Environmental As- mining p r ~ j e c t s . In sessment Policy, the sample included 15 ‘A’ projects, 17 ‘Byprojects, 5 ‘C’ projects, and one uncategorized 4.6 The Bank’s safeguard policies contain a long l i s t o f requirements that have been subject to differing interpretation and as yet no independent and generally agreed criteria have been es- tablished to determine if a project i s in substantial c o m p l i a n ~ eI n ~ absence o f an established . ~the approach, the Safeguards Review has synthesized the policy requirements into a set o f basic cri- teria, and applied them for the selected sample ofprojects. While there have been minor changes in some o f the policies since 1993, each project was evaluated based on the specific version o f the policy in force at the time the project was approved. 43 4.7 Overall, the majority ofprojects were found to be in substantially consistent with the appli- cable safeguards at approval and during implementation. Thus, about 74 percent o f the sample o f ‘A’ and ‘B’ projects were substantially consistent with safeguards at approval, 67 percent during implementation, and only 41 percent were rated to have had adequate supervision inputs and report- ing. The ‘A’ projects’ performance was higher than the ‘B’s inall three areas, but the difference was greatest at the approval stage. W h i l e the degree o f consistency was lower than the WBG aims to achieve, there i s no implication that the performance pattern o f these projects i s different from that in other sectors, since they are all subject to the same policies, procedures and constraint^.^^ 39. Since the start of fiscal 1993, the W o r l d Bank has approved 76 projects in the extractive industries or with sig- nificant components relating t o extractive industries. A s o f June 30,2002,48 projects have been completed (oil & gas, 24; mining, 24) and 28 projects are s t i l l active (oil & gas, 15; mining, 13). See paras. 2.18 ff. 40. The purposive selection o f projects that were likely t o have significant adverse environmental o r social impacts i s consistent with the objective o f the Safeguards Review, since the WBG’s safeguard policies are only applicable to such projects. A s a result, the validity o f the findings i s limited to suchprojects, and should n o t be extended t o those Category ‘C’ projects that were likely t o have minimal or n o adverse impacts, o r SAL’S, w h i c h are not covered by the safeguard policies. 41. As stated in the Bank’s policy o n Environmental Assessment (OP 4.01), t o f a l l under Category A, a project i s deemed to be likely t o have significant adverse environmental impacts that are sensitive, diverse, or unprecedented. Category B i s assigned t o projects whose potential environmental impacts are less adverse than those for Category A. Category C i s for projects that are likely t o have minimal o r n o adverse environmental impacts. Sectoral adjust- ment loans (SECALs) have o n l y been covered by the policy since 1999. Earlier SECALs were uncategorized. 42. These requirements are recorded inAnnex I-A and I-B o f the Safeguards Review. The l i s t i s based o n the latest version o f the policies (as o f June 30, 2002). 43. The individual project review worksheets were sent t o the relevant project managers for fact checking. 44. I t should also be noted that the extractive industries portfolio includes a higher share o f T A and SECAL projects, whose classification has been subject to differing interpretation, as is discussed below in paras 4.14 ff. 22 4.8 The degree o f consistency appears to have improved modestly over time. A comparison o f the findings for the ‘A’ and ‘Byprojects in the sample approved before and after end-1995 indi- cates that, at the approval stage, there has been no overall trend. At the implementation stage, how- ever, there has been some improvement in the more recent 4.9 The findings o f the Safeguards Review fall between those o f the external and internal surveys. The survey o f participants o f the EIR’s Regional Stakeholder Workshops,46found that, with regard to the promotion o f sustainable environmental performance and mitigation o f nega- tive environmental effects, the WBG’s effort was rated “mostly effective” or better by 60 percent o f respondents, and its success as “mostly effective” or better by 46 percent. With regard to the promotion o f sound social development and the identification and mitigation o f negative social impacts o n local communities and indigenous peoples, the WBG’s effort was rated “mostly ef- fective” or better by 40 percent o f respondents, and i t s success as “mostly effective” by 28 per- cent. Bank staff involved in E1projects, on the other hand, feel more positive about the adequacy with which E1projects have mitigated negative environmental impacts (83 percent) and social impacts (75 percent). While the survey findings corroborate that the E1portfolio faces a gap in fully achieving the objectives o f the safeguards, the difference with the Safeguards Review points to the possibility o f both internal and external perception gaps. 4.10 The review also identified a number o f promising practices that have established new benchmarks for safeguard policy implementationperformance and “value added.” Such practices were found in the Bolivia-Brazil Gas Pipeline Project, Chad-Cameroon Petroleum Development and Pipeline Project, Poland Coal SECAL 1 1, and Thailand Clean Fuels and Environmental Im- provement Project. These projects have achieved international recognition for the comprehen- siveness o f their environmental and social mitigation measures and stand as examples for what compliance with safeguards can achieve. Issues During Safeguards Implementation 4.1 1 The most important inadequacies in the implementation o f safeguards can be associated with shortcomings at the initial project screening. Another important source o f problems, and a possible explanation for the decline in safeguards implementation from approval to implementa- tion, relates to inadequacies in supervision and rep~rting.~’ 45. Given the small size o f the sample, it was n o t feasible to evaluate any impact f r o m the Bank’s enhanced safe- guards compliance system established in 1999. 46. See footnote 13 for additional information about the survey. The complete results are provided in Volume 111, Annex 4 B. 47. The adequacy o f the initial project screening and o f Bank supervision were not themselves criteria for evaluating the adequacy o f safeguards compliance at the project approval or implementation stage, but factors that were tracked and assessed in parallel as part o f the safeguards review. 23 Initial Project Screening 4.12 A major finding o f the Safeguards Review i s that the initial screening ofprojects4*has im- portant implications for the subsequent preparation, appraisal, and supervision o f the project. In some cases, screening decisions resulted in assignment o f a lower environmental category than may have been warranted given the nature o f the p r ~ j e c t . This ~ ’ i s important because there tends to be less attention and resources devoted to the assessment and mitigation o f environmental impacts in lower EA categories. 4.13 On the other hand, not all difficulties in achieving the objectives o f the safeguards can be traced to shortcomings inthe initial project screening process. Infact, while 69 percent o f the pro- j ects that were not substantially consistent with safeguards had been incorrectly screened, over h a l f o f the projects that had been incorrectly screened were in substantial consistency with policy requirements at the approval stage in terms o f the adequacy o f provisions for mitigation o f poten- tial adverse impacts (See Figure 4.1). These findings suggest that, while shortcomings at the ini- tial project screening can be an important source o f concern, these upstream errors can often be overcome by appropriate efforts during subsequent project preparation and appraisal. Figure 4.1 : Initial Project Screening and Consistency with Safeguards Inadequate Adequacy of Initial Project Screening quate High Modest Or Negligible Degree of Consistency at Approval 48. That is, the process by which the EA category i s assigned, the nature and extent ofthe EA or environmental analy- sis is decided, and the applicable safeguard policies are identified. Responsibility for the initial project screening re- sides with the project’s task team, under the supervision o f regional management, subject t o clearance by the re- gional safeguards coordinator, under the oversight o f the central Quality Assurance and Control Unit (QACU). Before 2000, responsibility for initial project screening was shared between the project’s task team and the Bank’s regional environment divisions. 49. O f the 11projects, 6 were ‘B’ projects that should have been more appropriately categorized as ‘A’, and 5 were ‘C’ projects that should have been more appropriately categorized as ‘B’. See para. 4.1 1 ff. 24 EA Categorization 4.14 The Safeguards Study concluded that, o f the sample o f 38 projects, 6 out o f the 17 Cate- gory ‘Byprojects should have been classified as Category ‘A,’ and all five o f the ‘C’ projects should have been ‘B.’ I t is recognized that the definitions o f EA categories were mainly developed for application to “investment” projects, and before the social and legal safeguard policies assumed as much importance as they have inthe past decade. Since the late 1980s the Bank has been diver- sifying and expanding i t s array o f lending instruments,’O while EA categorization definitions and guidance on application o f appropriate EA instruments5’ have not kept pace. The study found two major areas where greater clarity i s needed. 4.15 Sectoral Adjustment Projects: Five o f the six ‘Byprojects which should have more ap- propriately categorized as ‘A’s were SECALs involving the closure o f mines.52 W h i l e the EA OP 4.01 can be interpreted to allow categorizing them as ‘B’s, i t would have been more appropriate to categorize them as ‘A’s, given the significant, diverse, and unprecedented cumulative impact o f the mining sector on the environment and communities in the mining areas, and to ensure a level o f attention, normally associated with a full EA, commensurate with the degree o f envi- ronmental and social impacts and risks.53Thus, the guidance set out in the (1993) EA Source Book Update on Environmental Screening recommends that Sectoral EAs (SEA) be carried out for SECALs, and the (1 99 1) EA Source Book54 recommends that EIAs be carried out on each individual mine closure plan.55While this guidance i s not mandatory, they support the objectives o f the safeguards policies and OED has used them to underpin i t s assessment. 4.16 Among mining SECALs, the Poland Coal SECAL I1illustrates the potential usefulness o f an Sectoral EA which, for this project, found that the damage costs o f saline water discharge were not as serious as previously estimated56and identified land subsidence as a potential prob- lem. It also found several shortcomings in clarity and prioritization o f recommended actions in 50. T h e Bank’s Operational Manual lists seven investment lending instruments: Specific Investment Loan (SIL); Learning and Innovation Loan (LIL);Technical Assistance Loan (TAL); Emergency Recovery Loan (ERL); Financial Intermediary Loan (FIL); Sector Investment and Maintenance Loan (SIM); and Adaptable Program Loan (APL).The manual l i s t s the following six adjustment lending instruments: Programmatic Structural Adjustment Loan (PSAL); Poverty Reduction Support Credit (PRSC); Sector Adjustment Loan (SECAL); Structural Adjustment Loan (SAL); Special Structural Adjustment Loan (SSAL); and Rehabilitation Loan (RIL). 5 1. ETA, Sectoral EA, Regional EA, Environmental Audit, Hazard/Risk Assessment. 52. The five SECALs in Russia, Poland, and Ukraine were subject to careful environmental and social review. The remaining one i s the Madagascar Sector Reform Project, which should also have been categorized as an ‘A’ because o f proposed new port facilities. 53. T h e mine closures supported by these SECALs were unprecedented inscale, diversity o f environmental conditions, and the complexity o f environmental, safety, and social issues. The past environmental and social neglect o f these min- ing operations firther aggravated the problems involved in their closure. 54. W o r l d B a n k 1991. 55. As indicated earlier, there i s n o implication that the treatment o f extractive industries projects in this regard i s different f r o m the Bank’s practice in other sectors at the time, w h i c h was t o interpret the EA Source B o o k with great flexibility. Inrecent years, management, the Inspection Panel and the Bank’s legal department have clarified that the EA Source B o o k i s to be followed. The Safeguards Review i s in line with this position. 56. However, Poland’s M i n i s t r y o f the Environment has not endorsed this conclusion. 25 the mine-specific EIAs. Other mine restructuring SECALs did not follow this model and there- fore may have missed the opportunity for considerably more appropriate and cost-effective ac- tions for mitigating negative environmental and social impacts. 4.17 Technical Assistance Projects: While six o f the Technical Assistance projects in the sample were correctly categorized as ‘A’ or ‘Byprojects, five were incorrectly categorized as ‘C.’ As noted in the (1993) EA Source Book Update on “Environmental Screening”: while most technical assistance (TA) projects shouldfall into Category ‘C’ ... certain T A operations are de- signed topave the way for major investments orprivatization ... I n such cases, it is appropriate to undertake a limited review of the environmental institutional and regulatory framework for the sector and recommend improvements (as needed). Category B is normally the correct classi- fication for such projects. ”’’ 4.18 The Colombia Energy TA project, a ‘B,’ illustrates the importance o f early attention to the environmental and institutional and regulatory framework, which allowed for the preparation o f a well-designed set o f components to operationalize the application o f the Bank’s safeguard policies. On the other hand, in line with the objectives o f the safeguard policies, TA projects in Cameroon, Kazakhstan, Papua New Guinea, Russia, and Zambia should all have been catego- rized as ‘B’s rather than ‘C’s, which resultedin less attention being given to reviewing substan- tial issues o f environmental and social impacts that can emerge in the process o f attracting major investments and preparing the ground for privatization. Identification of Applicable Safeguards 4.19 An important function o f the initial project screening i s to identifythe safeguardpolicies that should apply to a particular project. Aside f?om the EA policy, the most frequently triggered safe- guards in the sample o f extractive industries projects relate to involuntary resettlement, indigenous peoples, natural habitats, dam safety, and cultural properties. There i s a natural inclination to down- play the relevance o f individual safeguards in order to simplify processing o f projects. Moreover, in the case o f TA projects, such issues as protection o f natural habitats, cultural property, and indige- nous people, etc., while possibly relevant to the sector, had not been triggeredwhen needed, as the policies have beenworded to apply when “investment” projects are undertaken. This i s unfortunate, as often the TA projects are helping govemments to improve the regulatory system for private in- vestments in extractive industries for which such issues are highly relevant. 4.20 Involuntary Resettlement: O f the seven projects that should have triggeredthe Involuntary Resettlement policy, four had prepared comprehensive Resettlement Action Plans (RAPS),while for three o f the projects the RAPS were either not prepared or inadequate. The risks associatedwith inadequate safeguard identification at the screening stage are illustrated by the Second Gas Trans- mission Project in Thailand,58where the issue o f resettlement only arose very late inproject prepa- ration - so late, in fact, that i t had to be dealt with at loan negotiations. At this stage it was not even certain how many people had to be relocated and how many had to be compensated for loss 57. Environmental Assessment Sourcebook Update No. 2: Environmental Screening, April 1993, Environmental Department, World Bank, Washington, D.C. 58. Thailand: Second Gas Transmission Project. 26 o f income during pipeline construction or for loss o f structures. W h i l e the completion document reports that the resettlement o f the few families was in line with the guidelines and carried out without a problem, it also reports that problems with land acquisition were compounded by diffi- culties in purchasing the right-of way because o f landowner lock-outs. There were also problems .~ with squatters moving onto the pipeline route in an attempt to obtain c o m p e n s a t i ~ nIt i~ s quite possible that problems, which happened before in earlier projects, could have been reduced through earlier identification o f resettlement issues and the earlier involvement o f resettlement specialists in planning for their mitigation, as would have been appropriate. 4.21 Indigenous Peoples: Three out o f the seven projects for which the Indigenous Peoples pol- i c y applied met the requirement for preparation o f an Indigenous Peoples Development Plan (IPDP). A good example o f an IPDP was prepared for the Bolivian section o f the Bolivia-Brazil Gas Pipeline Project. Under this plan, indigenous peoples landrights were established through land titling and communities were supported in developing sustainable resource management practices. A Trust Fund o f U S $ l million was also established for protection andmanagement o f the Kaa-Iya National Park, which i s co-managed by an indigenous NGO in collaboration with Bolivia's Na- tional Protected Areas Agency. 4.22 Natural Habitats: Three o f the five projects in which the Natural Habitats policy applied met the requirements o f this policy. For the Chad-Cameroon Pipeline Proj ect6' alternative corri- dors for the pipeline were assessed and alignment o f the pipeline within the preferred corridor was optimized from cost, technical, safety, environment, and social perspectives. In addition to aligning the pipeline to follow existing infrastructure and/or traverse degraded landto the extent possible, due to the proximity o f the right-of-way to areas o f important natural habitat in Camer- oon, biodiversity impact mitigation measures included two environmental offsets -one for the semi-deciduous forest and one for the Atlantic Littoral forest. Supervision, Monitoring, and Consultation 4.23 Other issues that emerged from the Safeguards Review relate to (a) the adequacy o f su- pervision inputs and reporting, (b) the management and/or action plans that were prepared, (c) the adequacy o f provisions for monitoring and evaluation o f environmental and social impacts, and (d) provisions for disclosure and stakeholder consultation. 4.24 Supervision Inputs and Reporting: The study found that in only 41 percent o f the pro- jects in the sample, the task teams had adequately supervisedand reported the implementation o f safeguard policies. About 30 percent o f the projects in the sample (all o f which were likely to have adverse impacts) included environmental or social specialists in at least one supervision mission, which i s about half the level projected in the supervision plans prepared at appraisal.61 Frequent changes in task teams, especially task leaders, and the lower managerial attention and resources devoted to safeguards supervision in incorrectly screened and categorized projects, 59.The issue was settled amicably, but it took some time. 60. Cameroon: Chad-Cameroon Pipeline Project; Chad: Petroleum Sector Capacity Management Project. 6 1, As mentioned inpara. 4.12, t h i s may be related t o the fact that many o f the projects had been assigned t o lower EA categories or applicable safeguards were not triggered at the initial project screening. 27 also contributed to the modest intensityo f safeguards supervision, as reflected in infrequent and inadequate reporting on safeguard policy matters in aide-memoires, supervision reports, and completion reports. 4.25 These issues are important since they account for the entire slippage inthe projects’ consis- tency with safeguards from the approval to the implementation stage. Thus, for about a quarter o f the 23 projects for which supervision inputs and reporting were inadequate, the consistency with safeguards deteriorated during implementation. O n the other hand, o f the 14 projects that were adequately supervised, not a single one failed to meet the safeguard objectives, and 2 previously inconsistent projects (14 percent) became substantially consistent with safeguards during imple- mentation (see Figure 4.2). Figure 4.2: Adequacy o f Project Supervision and Change in Consistency with Safeguard Objectives Percentage Projects: (No. of Projects) Quality of Project Supervision Change in Consistency with Safeguards Objectives from Approval to Implementation 4.26 The oversight and reporting o f safeguards compliance and Environmental Management Plan (EMP) implementation can only be as effective as the environmental and social monitoring reporting system provided for under the projects. Since these were found to be deficient innearly half o f the projects reviewed, the same can be said for the oversight system. Supervision reports generally record safeguards compliance positively without any discussion or evidenceprovided in the text, and there was only a single reported violation o f safeguard policies.62Finally, less than a quarter o f the ICRs reviewed discuss the implementation o f safeguards, even though the Bank’s I C R policy requires such a discussion for all Category A projects andthose that triggered any other safeguards, and could reasonably be expected for all Category B projects. The paucity o f monitor- ing, documentation, and reporting o f the projects’ implementation o f safeguards i s a weakness in the oversight system that has to be addressed given the importance o f the issues for the sector. 62. The PSR for the India Coal Sector Rehabilitation Project (CSRP) datedMarch 28,2001, records a “Highly Unsatis- factory” rating in respect o f compliance with the safeguard policy for Involuntary Resettlement (OD 4.30), prior to receipt o f a complaint by the Inspection Panel (RQ01/2) on June 21,2001. 28 4.27 Environmental and Social Management andAction Plans: The basic instruments that the Bank safeguard policies rely on for implementation o f environmental and social mitigation meas- ures are the Environmental Management Plans (EMPs), Resettlement Action Plans (RAPS),and Indigenous Peoples Action Plans (PAPS). The review found that EMPs are beingprepared to an appropriate standard for 93 percent o f the ‘A’ projects, but only 60 percent o f the ‘B’ projects. Since the EA policy leaves the decision on the scope o f EMPs to the judgment o f Bank staff, this i s likely to have been less o f a compliance problem if the projects had been assigned to their proper EA category at the screening stage, with attendant greater availability o f resources for specialist staff to help define and supervise the EMP. Similarly, about half o f the sample projects that in- volved involuntary resettlement and affected indigenous peoples did not have comprehensive and implementable R A P s and PAPS, largely because the relevant safeguards had not been triggered at the initial project screening. 4.28 Monitoring and Baseline Surveys: An important requirement, often overlooked, i s that o f monitoring and evaluation o f safeguard compliance “on-site,” which was effectively imple- mented in only about 33 percent o f the projects reviewed. This weakness inthe compliance over- sight and supervision system, if allowed to persist, can lead to substantial and costly failures for the borrower as well as the Bank. Moreover, it i s rare that a monitoring plan, no matter how well prepared, will completely cover all the potential environmental and social impacts in any new project. Some impacts only become evident during implementation. Such impacts can be most quickly and effectively documented if comprehensive environmental and social baseline surveys have beenprepared before project implementation, as were available for only about h a l f o f the ‘A’ projects in the sample.63 4.29 Public Disclosure, Consultation, and Participation: Bank policy expects the borrower to consult project-affected groups and local NGOs for all Category A and B projects, to disclose relevant EA materials, and to incorporate their legitimate concerns into project designs. The spe- cific requirements are somewhat more rigorous for ‘A’ than for ‘B’ projects. The Safeguards Re- view found that public consultation in the EA preparation process had been substantially ad- dressed in 73 percent o f the ‘A’ projects in the sample and 38 percent o f the ‘Byprojects. Stakeholder participation, in terms o f opportunities to influence and share control over develop- ment initiatives, decisions and resources, i s not required under Bank policy, and has only been attempted in a few projects. 4.30 Here again, the ‘Byprojects appear to have had fewer resources thannecessary to devote to this area, with the attendant consequences. The ICRs o f several ‘Byprojects where consultation took place noted the importance o f stakeholder consultation. OED’s assessment o f a ‘B’ project in Ecuador, inwhich hllpublic consultation only started 5 years into implementation, concludes the projects and programs involving natural resources extraction need to be carefully andpro-actively managed. Effective communication, consultation and stakeholder participation strategies need to be designed early during preparation and maintained throughout implementation. 4.3 1 Beyond consultation, the Bolivia-Brazil Gas Pipeline Project offers an excellent model for the establishment o f an participatory safeguards compliance monitoring, evaluation, and re- 63. The Bank’s EA policy only requires comprehensive environmental and social baseline surveys for Category A projects. 29 porting framework. The completion report notes that continuous dialogue and exchange o f in- formation between the local communities and civil society representatives with the environ- mental inspectors, environmental auditor, ombudsperson was an important feature o f the on-site supervision o f the environmental and social concerns. This process allowed a growing under- standing o f the concerns o f each o f the stakeholders, the identification o f new issues, better monitoring o f the performance o f social compensation programs in the field and, more impor- tantly, an improvement o f the environmental inspectiodmonitoring system, which resulted in a better definition o f roles and hnctions for the contractor environmental field inspectors, the en- vironmental inspection team and management unit independent from the contractor, and the in- dependent environmental Auditor and Ombudsperson. SAFEGUARDS: “DOING GOOD” BEYOND 4.32 An important aspect o f the Bank’s approach to development assistance involves the pur- suit o f positive environmental and social impacts beyond strict compliance with safeguards, such as the remediation o f pre-existing conditions resulting from past mining and petroleum activities, and the strengthening o f the policy and institutional framework to promote the implementation o f safeguards across the entire economy. Many extractive industries projects have such objec- tives and components. Addressing Pre-existingEnvironmental Conditions 4.33 Environmental Rehabilitation: Nine completed projects (oil & gas: 5; mining: 4) pro- vided assistance for addressing environmental impacts fiom past or ongoing extractive industries activities, while other completed projects approached them as part o f larger efforts in economic transition. Based on the generally limited information provided in the ICRs, pre-existing envi- ronmental conditions appear to have been addressed in a moderately satisfactory or better man- ner, in all but two cases (see B o x 4.1). 4.34 Pre-existing environmental impacts tended to be given less priority in countries where the sector faced poor economic and financial conditions, where the priority was to restore production levels and earn import revenues, and the mitigation components were a relatively small part o f the project. All these factors were evident in Russia’s O i l Sector Rehabilitation Iand I1projects as well as Coal SECAL I and I1projects. Incountries where the economic and financial situation was relatively better (Poland’s Hard Coal SECAL I and 1 1) and in cases where environmental components were larger relative to the entire project (Mongolia Coal project) and where stake- holder participation was higher (Tanzania Mineral Sector Development TA), there was greater progress on dealing with pre-existing environmental impacts. 4.35 Social Rehabilitation: The results from dealing with social impacts in the context o f mine rehabilitation projects were mixed. Important coal mine rehabilitation projects in Poland, Russia, and Ukraine substantially achieved their mine closure objectives, but the results on the social front have been mixed. The greatest difficulties were faced in generating alternative em- ployment for workers who lost their jobs in the rehabilitation and mine closure process. I t i s rec- ognized that the difficult economic transition in Russia and Ukraine made it very hard to make progress in generating alternative employment, and it i s not clear if these issues were addressed through projects in sectors other than the extractive industries. Another area o f concern was find- 30 ing altemative funding sources for social services that previously had been provided by the state mining enterprises. These issues are important since the process by which employment reduction i s handled i s crucial for the acceptance by the mining communities o f economically necessary mine closure programs. Box 4.1: World Bank Projects and Pre-Existing Environmental Impacts nthe oil & gas sector, the efforts included controlling drilling wastes and reducing environmental im- I pacts from existing oil and gas operations (Russia); controlling and mitigating pollution from refinery activities (Thailand); controlling pollution from leaking pipes and storage facilities (Tanzania); and ad- dressing the impact o f petroleum development in an area o f extreme environmental sensitivity near the Caspian Sea (Azerbaijan). Inthe mining sub-sector, pre-existing pollution issues included water and air pollution fiom m i n e tailings and airborne particles (Guinea, Peru, Poland, and Mongolia); environmental impacts on surrounding communities (Ghana, Russia); contamination from activities o f artisanal and informal miners (Ecuador, Peru); a strategy to control widespread mine fires that were affecting local infrastructure, farmland, and habitation, and could potentially dislocate hundreds o f thousands o f people in the Jharia coalfields (In- dia); and passage o f a new environmental code for mining to ensure cleanup of existing pollution andrig- orous guidelines for new foreign investors (Peru). The efforts in Tanzania and Thailand yielded positive results, and good progress was made in Peru where contamination levels were reduced by 15 to 20 percent, and in Poland, where saline water and solid dis- charge from coal mines were reducedby 2 1percent and 29 percent, respectively. Under the Mongolia Coal Project, a beginning was made by establishing an Environmental Management Unit. In Guinea, environ- mental audits o f all mining operations were carried out. Ghana’s project made some headway inreclaiming three pilot areas reclaimed, and launched a “green communities” plan. Source: Portfolio Review Capacity-Building and Reform for Environmental and Social Management 4.36 Components in support o f capacity building, institutional development, andpolicy reform for environmental management were part o f 16 completed and 9 active projects. Most o f the ac- tivities were completed satisfactorily. For many o f these efforts the impacts are not evident from the ICRs, perhaps because results may be realized only in the long term. Projects in three coun- tries - Burkina Faso, Madagascar, and Mauritania - aim to improve capacity for environ- mental management in their mining sectors. Burkina Faso’s Mining Capacity Building project seeks to establish capacity for environmental management. The Madagascar Mining Sector Re- form project will establish capacity in the country by means o f pilot projects to identify and ad- dress environmental as w e l l as social impacts from mining. The Mauritania Mining Sector Ca- pacity Project has an Environmental Management System to include capacity building at the Ministry o f Mining and Industry, for monitoring and enforcement o f environmental regulations. 4.37 Capacity building for environmental and social management represents a valuable contri- bution by the Bank to client countries at a relatively l o w cost. W h i l e i t i s too early to judge the im- pacts o f these project components inmany cases, indications are that most o f the changes are sus- tainable, especially in countries that already had a reasonable level o f institutions and human resources inthese areas. The Bank’s cross-country experience also helped client countries to learn from other countries facing similar environmental situations. The number o f efforts to build capac- ity for environmental management in extractive industries projects appears to be increasing. 31 Other EnvironmentalBenefits from Extractive Industries Projects 4.38 Inthe portfolio o f 48 completed projects, five projects produced other miscellaneous envi- ronmental benefits. Under Brazil’s Gas Sector Development project, the creation or improvement of 13 national parks was initiated. This project, as well as Thailand’s Gas Transmission Iand I1 projects made available larger amounts o f environmentally acceptable fie1 -natural gas -and along with Thailand’s Clean Fuels and Environmental Improvement, had consequent benefits for air quality and health. Bosnia-Herzegovina’s Natural Gas System Reconstruction project helped reduce environmental pollution through rehabilitating war-damaged gas distribution systems. Missed Opportunities in Addressing Adverse Impacts 4.39 The survey o f Bank staff followed-up on a recent QAG Quality-at-Entry Assessment, which noted, “in numerous interviews with task teams, panelists detected an aversion to including project components that may trigger safeguard policies, . . .[and], , .that it was too risky to design operations with significant social safeguard issues.”64 Thus, the survey asked if the WBG has avoided good projects inthe E1sectors due to concerns related to safeguards policies. The majority o f respondents agreed that this has been the case, particularly in response to concerns originating f i o m WBG management (86 percent) and WBG task managers (56 percent), rather than client countries (22 percent) or private investors (40 percent). This suggests that the WBG i s missingop- portunities to help i t s clients address adverse impacts inthe sector mainly because o f an internally generated aversion based on the significant costs and risks associated with its safeguard policies. CONCLUSIONS 4.40 The Safeguards Review o f a sample o f extractive industries projects most likely to face environmental and social challenges found the majority to be substantially consistent with appli- cable safeguard policies, but the degree o f consistency i s below the expectation that Board ap- proved policies will be implemented as a matter o f routine.65The degree o f consistency varied greatly depending on the phase o f project cycle and the environmental category o f the projects. The degree o f consistency appears to have improved modestly over time. The review also found that supervision inputs for and reporting o f safeguards compliance had been adequate for less than half o f the projects. 4.41 The most important shortcomings with regard to the implementation o f safeguards can be traced to inadequacies in the initial project screening. Another important source ofproblems was inadequacies in supervision inputs and reporting. Inadequate attention to safeguards policy com- pliance during project implementation i s also reflected in the fact that environmental and social specialists were involved in supervision in only about 30 percent o f the sample, and that fewer than a quarter o f the project completion reports discuss this subject. 64. World Bank 2001d. 65. However, some allowance needs to be made for the evolving more rigorous interpretation o f these policies, in a world that i s ever more concerned about sustainable development, as noted in para. 2.10. 32 4.42 W h i l e the validity o f these findings i s limitedto the sample o f projects that was reviewed, some o f the implications o f those findings may be helphl for strengthening the Bank’s safeguards framework, which i s no different for extractive industriesthan for other types ofprojects.66Inpar- ticular, the findings point to the need for clearer and more consistent guidance for the categoriza- tion o f sectoral adjustment and technical assistance projects, the identification o f applicable safe- guards at the initial project screening, the appropriate scope and arrangements for monitoring of safeguards compliance duringproject implementation, including the preparation o f comprehensive baseline surveys at the start o f the project, and the reporting and evaluation o f results at project completion. Some improvement here would be o f particular importance to the extractive industries portfolio, given i t s large share o f sectoral adjustment and technical assistance projects, the inade- quacies inmonitoring and reporting, and the extensive controversy surrounding the sector’s envi- ronmental and social impacts. 4.43 On the other hand, the Bank’s safeguards policies have received wide acceptance, even for projects where the Bank i s not involved, which points to the potential for the Bank to con- tinue buildingon i t s global mandate and convening power for catalyzing good practice inrespect to safeguards and other issues. Beyond compliance with safeguards, the Bank’s efforts at “doing good” by addressing pre-existing environmental “legacy” issues and building capacity for the management o f environmental and social impacts have yielded mostly satisfactory results. These appear to be areas where the Bank should continue to make a valuable contribution to the devel- opment o f the resource-abundant countries. 66. Here again, there i s n o reason t o believe that the performance o f extractive industries projects in t h s regard i s different that that o f projects in other sectors. 33 5. From Resource Revenues to Sustainable Development 5.1 From a country development perspective, the most important component o f the economic benefits from extractive industries i s usually the flow o f fiscal revenues that can be used for growth-promoting public expenditure^.^' Thus, this chapter assesses the Bank’s efforts to inte- grate the incremental revenues from resource extraction into the countries’ overall development strategy through improved fiscal management and expenditure policies.68While the potential for major fiscal revenues i s generally greater from the petroleum than the mining sector, it i s useful to discuss them together in light o f their shared characteristics o f volatility and exhaustibility. LINKINGE1 SECTOR DEVELOPMENT COUNTRY ASSISTANCE TO OVERALL 5.2 The management o f E1revenues cannot be isolated from the larger context o f economic management. Ina resource-rich country, E1revenues deserve special attention because oftheir im- portance to the economy, and their concentration in a few sources, which affords greater scope for rent-seeking. Hence, an assistance strategy for a resource-abundant country must not only recog- nize the specific issues involved in managing E1revenues but also chart their linkages with the broader management o f the country’s development. 5.3 A review o f the World Bank’s most recent Country Assistance Strategies (CASS)~’ found that a majority (64 percent) o f those for poorly performing EI-dependent c ~ u n t r i e srecognized ’~ one or more issues related to the management o f E1revenues (see Figure 5.1).’l The issues that were mentioned spanned a wide range, including the management o f volatility and exhaustibility o f E1revenues (Azerbaijan, Mongolia), achieving macroeconomic stability (Gabon, Trinidad and Tobago), public expenditure policies for E1revenues (Bolivia, Chad), transparency in handling E1revenues (Kazakhstan, Papua New Guinea), diversification o f economic activity (Nigeria, Zambia), and reduction o f subsidies to the E1sectors (Russia). 5.4 In general, the mention o f E1revenue issues in a CAS does not appear to translate readily into developmental interventions by the Bank. The dearth o f follow-up interventions could be related to the relatively l o w level o f Bank involvement inpoorly performing EI-dependent coun- tries. World Bank lending per capita over 1990-99, was significantly lower (at US$47) for poorly performing EI-dependent countries, than for better performing EI-dependent countries 67. Other potential economic benefits include financial flows accruing t o private investors, employees, local com- munities, etc., w h i c h represent compensation for risk capital, labor, and social and environmental services. 68. Beyond the allocation o f fiscal revenues in line with national development priorities, an assessment o f the effi- cacy o f public expenditure for achleving sustainable development and poverty reduction was outside the scope o f t h s evaluation. Such assessments are regularly included in OED’s Country Assistance Evaluations. 69. As stated in B P 2.11, “The Country Assistance Strategy (CAS) i s the central vehicle for Board review o f the W o r l d Bank Group’s assistance strategy for IDA and IBRD borrowers. The C A S document (a) describes the W o r l d B a n k Group’s strategy based o n an assessment o f priorities in the country, and (b) indicates the level and composi- t i o n o f assistance to be provided based o n the strategy and the country’s portfolio performance.” 70. That is, those with negative GDPicapita growth during the 1990s. 7 1. The percentage was higher for better performing EI-dependent countries at 80 percent, and lower for non-E1 dependent countries. 34 (US$SO) or poorly performing non-EI-dependent countries (US$61) (see Figure 5.2). While this i s a consequence o f the Bank’s country policy and institutional performance based allocation o f IDA credits, there i s no indication that the shortfall in lendinghas been mitigatedby non-lending interventions such as economic and sector work, as would seem desirable in light o f these coun- tries’ needs72(see Box 5.1). Figure 5.1: Percentage of Countries Whose CAS Refers to E1 Issues Percentage of CASs with references to El Average GDP per capita growth, 1990-99 El dependence (avg. El exportsltotal exports, 1990-99 No. of countries in parenthesis Figure 5.2: IBRD/IDA Lending per Capita (no. o f countries) Average GDP per capita growth El dependence (avg. El exportsltotal exports, 1990-99) No. of countries in parenthesis 72. M a n y o f these countries fit the description o f low-income countries under stress (LICUS). A s stated in the L I C U S Task Force Report (World Bank 2002): “Low-income countries under stress are characterized by very weak policies, institutions, and governance. Aid does not w o r k w e l l in these environments ...Y e t neglect o f such countries (by the development community) perpetuates poverty and m a y contribute to the collapse o f the state, with adverse regional and even global consequences.” 35 Box 5.1: Analytical and Advisory Activities in the E1 Sectors The Bank has engaged in a variety o f analytxal and advisory activities (AAA) inthe E1sectors, including eco- nomic and sector work (ESW) as well as sponsoring meetings, conferences, and workshops for stakeholders. None o f the AAA in the E1sectors has been evaluated through either self-evaluative Activity Completion Summaries (ACS)a or the annual reviews o f E S W by the Quality Assurance Group (QAG) from 1998 to 2001. However, some reporting in the ICRs, as well as in country case studies prepared for this evaluation, gives an idea o f the integration o f representative AAA with project preparationb InPapua N e w Guinea, the Bank has provided a range o f E S W o n many occasions since the 1980s in the mining sector and it undertookreviews o f environmental issues in 1992 and again in 2000 that provided input into the miningTA project. The Argentina Mining Sector Review (1993) helped improve the qual- ity o f project preparation for the country’s Mining TA and Mining Sector Development TA projects. In Ecuador, the Bank assisted the govemment inthe preparation o f a MiningSector Policy and Strategy Paper in 1990 (updated in 1993) stressing the need for legal and institutional reform to attract private sector in- vestment in the sector, and to address environmental impacts o f artisanal and small-scale mining. Other illustrative publications from the oil & gas sector on institutional development and policy issues in- clude “Legislative Frameworks Used to Foster Petroleum Development” (1995), “Management of Oil Windfalls in Mexico: Historical Experience and Policy Options for the Future” (2001), and “Does Mother Nature Corrupt? -Natural Resources, Corruption and Economic Growth” (1999). In the mining sector, several country-level sectoral reviews have been prepared, among them the Kyrgyz Republic: Mining Sector Review (World Bank 1994a), Russian Federation: Restructuring the Coal Indus- t y : Putting the People First (World Bank 1994b), Kazakhstan: National Gas Investment Strategy Study (ESMAP 1997), and Ecuador - Public Sector Reforms for Growth in the Era o f Declining Oil Output (1991). “AMining Strategyfor Latin America and the Caribbean” (Van de Veen et al. 1996) and “Strategy for African Mining” (World Bank 1992) spell out strategies for boosting private investment in the regions. a. At least since 1998, the Bank has required Activity Completion Summaries to be prepared for all ESW with a budget of $50,000 or above, within six months after “delivery to client.” In AFR, there i s no threshold, and in ECA it i s $15,000. b. A detailed list o f ESW by the Bank in both oil & gas and mining sectors i s included in the Bibliography annexed to the Portfo- l i o Review. Source: Country Case Studies, World Bank 5.5 For a more in-depth assessment o f the Bank’s involvement in the revenue management issues o f EI-dependent countries, the Revenue Study reviewed CASs, Country Assistance Evaluations (CAEs), project documents for E1 and other sectors, and adjustment lending and Public Expenditure Reviews and other documents for five EI-dependent countries: Bolivia, Ec- uador, Ghana, Kazakhstan, and Papua New Guinea.73 5.6 The study found that in all five countries, govemance was the key to successful manage- ment o f E1revenues and fed into the quality o f revenue distribution and utilization, as well as attempts at economic stabilization and diversification. Ecuador and Ghana lacked the political will and the fiscal discipline necessary to maintain macroeconomic stability, putting other re- forms injeopardy. Kazakhstan and Papua N e w Guinea showed little institutional development or commitment to governing openly or fairly. Only in Bolivia did the government show a commit- 73. The five countries were chosen based on the relative importance o f extractive industries intheir economies, the intensity o f Bank assistance they received, and for regional diversity. 36 m e n t to managing i t s revenues within the context o f overall public finance management, but even this country i s h a v i n g difficulty maintaining fiscal discipline. T h e Revenue Study also found that desirable structural reforms were slowed down in the face o f large resource f l o w s from resource extraction (see Box 5.2). Box 5.2: E1Revenue Management and Macroeconomic Performance: Some World Bank Country Experiences The World Bank has assisted several EI-dependent countries in reconciling E1revenue management with broader macroeconomic management. In most cases the outcomes have been less than satisfactory. In Ecuador, in the 1990s, the Bank identified constraints to macroeconomic performance as the major negative effect o f the decline in o i l revenues and their mismanagement, but it failed to develop a more comprehensive strategy to isolate the economy f r o m volatility and exhaustibility o f the resources and for sharing o i l benefits. Though the Bank provided financial assistance to sectoral rehabilitation and macro- economic stabilization, the expected reforms were not implemented and export and fiscal revenues went to finance highly inefficient public expenditures. Overall, the Bank had a very limited influence o n how o i l revenues were managed to promote macroeconomic stability and social equity. InGhana, duringthe 1990s, the Bank supported efforts for better financial management and c i v i l service reform, but OED’s Country Assistance Evaluation (CAE) o f 2000 found these efforts were only partly successful. M a n y shortcomings remain in the overall quality o f Ghana’s public governance, as illustrated by politically motivated spending on public sector wage increases and consumer subsidies before each election in 1992,1996, and 2000. These led to persistent macroeconomic instability withnegative conse- quences for investment and growth. In Kazakhstan, an inflow o f petroleum revenues created prosperity that began to produce symptoms o f the “Dutch disease” and reduced commitment to overall r e f o m , to the point that the country has forgone sound advice from the World Bank regarding the management o f E1revenues. In Papua N e w Guinea, private investment in the E1sectors created some prosperity in the early 1990s, after which the government discontinued reforms, which precipitated a financial crisis. Following this, the WBG supported a new government effort to restore macroeconomic stability and initiate structural re- form, with emphasis on governance and economic diversification. But macroeconomic mismanagement continued, compounded by political uncertainty and poor transparency and accountability, forcing the Bank to suspend the second tranche o f a structural adjustment loan. In Bolivia, WBG strategy in both hydrocarbons and minerals had great success in generating revenues, helped in great measure by the country’s own “capitalization” program. However, public expenditure management in the country i s s t i l l weak, and it has not responded well to several WBG technical assis- tance and structural adjustment operations targeted at public finance management, c i v i l service reform, customs administration, and judicial reform. Sources: Revenue Study, Country Case Studies. 5.7 T h e Revenue Study also found that w h i l e economic diversification through directing p u b l i c expenditure toward socially profitable investments i s necessary for the sustainable devel- opment o f EI-dependent countries, this approach has p r o v e d d i f f i c u l t to p r o m o t e in t h e face o f poor governance. Bolivia successfully developed agriculture in the lowlands, but at the cost o f additional environmental damages that are d i f f i c u l t to control. T h e Bank and the government showed clear c o m m i t m e n t t o develop agriculture in PapuaN e w Guinea early during the period, A - - 1 but after 10 years of assistance the strategic options for stimulating agriculture have yet to b e de- veloped. Ghana h a d difficulties in developing agriculture and streamlining cocoa production 37 management, and competition between mining and agriculture for arable land continues to be an important issue. The Bank advised Kazakhstan that efficient management o f the National O i l Stabilization Fund and better management o f public finances in general were preconditions for promoting economic growth in the non-extractive industries sectors, but governance o f the o i l fund and o f public finance continue to be difficult problems. Ecuador’s poor management o f public expenditures i s the core cause o f the continuous financial crises faced by the country in the 1990s and i t i s s t i l l excessively dependent on o i l exports. In general, while the World Bank supported diversification in all these countries, i t has not been able to address these diversifica- tion issues with any clarity, and the efficacy o f i t s interventions has been low. 5.8 Overall, the Revenue Study concluded that the relevance o f the World Bank’s interven- tions for revenue management in the E1sectors had been modest for Ecuador and Kazakhstan, substantial for Papua N e w Guinea, and high for Bolivia and Ghana. The study rated the efficacy o f interventions as negligible for Ecuador, Kazakhstan, and Papua New Guinea, modest for Ghana, and substantial for Bolivia. Managing Volatility and Exhaustibility of Revenues 5.9 Fewer than half o f the CASs for EI-dependent countries (12 out o f 26) recognized the im- portance o f dealing with volatility and exhaustibility o f revenues from the E1sectors. These CASs identified broad approaches to dealing with the issues: creation o f a windfall fund, and encourage- ment o f growth outside the o i l sector (Gabon); offshore funds (Kazakhstan); longer-term strategy o f fiscal management o f copper revenues, and diversifying exports (Mongolia); developing a strong private sector inindustries other than o i l (Azerbaijan); an o i l stabilization fimd (Colombia); and keeping a sizeable reserve cushion (Chile). 5.10 Intwo CASs a clear link was found between issues relating to volatility and exhaustibil- ity o f E1revenues, appropriate policy dialogue, and a lendinghon-lending program to address them: The P N G CAS addresses the country’s vulnerability to external shocks and enhancing macroeconomic stability through appropriate policy dialogue and a structural adjustment loan. The Kazakhstan CAS addresses the volatility inherent in commodity-led growth by proposing careful management o f o i l revenues, reflected in lending for public sector resource management and structural adjustment, as well as non-lending initiatives. 5.1 1 A general review o f experiences with savings and stabilization funds, with or without Bank intervention, as well as recent analytical work suggests that the experience with such fimds has been mixed, with the few important successes coming from countries with a strong history o f fiscal prudence (Botswana, Chile). Without such a tradition, the integration o f resource hnds with overall fiscal policy has proved problematic, and the stabilization o f expenditure has re- mained elusive (see B o x 5.3). Revenue Generation 5.12 Project components designed to help resource-dependent countries improve the genera- tion and accounting o f fiscal revenues from resource extraction were included in 10 o f the com- pleted projects in the portfolio. These components focused on improving the capacity o f gov- ernments to negotiate with investors and on upgrading accounting procedures to international standards, with mixed results. 38 Box 5.3: How Effective A r e Resource Funds? A number o f EI-dependent countries have responded to the prospect o f volatility and exhaustibility o f E1 revenues by setting up petroleum, resource, or future generations funds, with the objectives o f maintain- ing fiscal discipline, overall macroeconomic stabilization, or saving for future generations. These at- tempts have been mostly unsatisfactory. Papua N e w Guinea’s Mineral Resource Stabilization Fund (MRSF) o f the 1970s was depleted by with- drawals and excessive public spending, and was finally used up in 1999 to retire debt that had then reached 25 percent o f GDP. Ghana’s Mineral Fundi s currently a source o f controversy because i t s recipi- ents, both miningcommunities and the Ministry o f Finance, have mishandled i t s system o f resource-rent sharing. Kazakhstan’s National Oil Stabilization Fund, created in 200 1with the intention o f reducing the negative impact o f o i l revenues on the domestic economy and providing for the welfare o f future genera- tions, has yet t o evolve rules for transfer o f funds and establish spending priorities, and has already been criticized for misuse o f funds. The Petroleum Stabilization Fund established by Ecuador in 1990 turned into an additional source o f revenues to finance regular budgetary expenditures. InEquatorial Guinea, the government has established a Future Generations Fund in i t s overall scheme for the utilization o f antici- pated petroleum revenues, but n o significant amounts have been deposited. In general, the same elements o f disciplined economic management are needed to make a success o f a resource fund as are needed to run an economy effectively. Thus, recourse to resource funds i s unlikely to yield better results than pursuing equitable distribution and effective utilization o f E1revenues through sound fiscal policies. Source: Davis et al. 2001; World Bank; Country Case Studies. 5.13 Six o f the completed Technical Assistance Loans helpedto improve negotiating capacity and four others helped upgrade accounting procedures. Three projects, in Georgia (Oil Institution Building TA), Papua N e w Guinea (Petroleum Exploration TA), and Peru (Peru’s Energymining TA), helped build negotiating capacity through improved data collection and economic analysis for exploration and development. Capacity was developed in Russia for working with foreign suppliers and organizing bidding (Oil Sector Rehabilitation Iand I1projects) and in Equatorial Guinea (Petroleum TA project) for maintaining a dialogue on long-term development plans with o i l companies. 5.14 Four completed projects supported the adoption o f international accounting practices by state enterprises for improving transparency and compatibility with foreign investors: Azerbaijan’s Petroleum TA with respect to the State Oil Company o f Azerbaijan, the Mongolia Economic Tran- sition Support project for the planning and restructuring o f operations o f the ERDENET copper mine, and Thailand’s Gas Transmission I and I1projects with respect to the Petroleum Authority o f Thailand. The results are reported to have been satisfactory. 5.15 Efforts at improving capacity for negotiating with private investors and for adopting inter- national accounting practices have yielded generally favorable results. This was mainly because the client governments and implementingagencies recognized the immediate benefits o f attracting higher private investment and gaining more favorable contractual terms. The lesson is that where such conditions are given, these seem to be straightforward and effective project initiatives. 39 Revenue Distribution 5.16 A distribution o f E1revenues between federal, state, and local governments that i s broadly acceptable and sustainable t o k e y stakeholders i s critical for converting the revenues into sustain- able development and poverty reduction. Ingeneral terms, an acceptable distribution o f revenues i s that which i s consistent with national developmental priorities, subject to (i) entitlements o f legal, customary, and traditional owners o f resource rights, and sub-national units o f the government, as recognized under national laws, and (ii) compensation for negative environmental and social im- pacts. An additional negotiated p r e m i u m to local communities and governments may also b e ap- propriate, depending on national priorities. W h i l e the perception o f equity will vary, the experience o f several countries shows that it i s important that none o f the claimants gets an excessive share; poor govemance does not constrain the actual transfer o f funds; and there are clear regulatorypro- visions for using the funds in the intended manner (see Box 5.4). Box 5.4: Distribution o f E1 Revenues - Striking the Right Balance Striking the right balance in distribution o f E1revenues involves many complex issues and needs firm institutional arrangements and provisions for consultations between stakeholders to arrive at equitable and sustainable arrangements. The government o f Papua N e w Guinea (GOPNG) has handed over a greater a share o f the resource rent to the provincial governments and landowners since pioneering an innovative “Development Forum” in 1989 to represent their interests. In a recent project, GOPNG ceded 30 percent o f i t s equity to the land- owners, though the 1998 Oil and Gas A c t had established a cap o f 20 percent. Neither side has demon- strated effective use of these resources, and i s clear that the distribution o f revenues has not yet been set- tled to everyone’s satisfaction. nEquatorial Guinea, all o i l revenues accrue to the central government, which exclusively decides their I allocation, though local municipalities are deeply affected by the o i l economy. I nChad, just under 5 per- cent o f anticipated o i l revenues are allocated to the local authorities in the o i l production region and 70 percent to poverty sectors throughout the country (including the o i l producing region). The experience of Nigeria and Peru illustrates h o w revenue distribution can go awry for lack o f proper implementation and proper regulatory mechanisms. I nNigeria, federal revenues, predominantly from oil, appear t o be reasonably shared between the federal government (49 percent), state government (24 per- cent), and local government (20 percent). Inpractice, these shares are not realized because ofprior appro- priations, which are taken o f f the top, effectively reducing the share o f state and local governments, mak- ing the issue one of actual implementation and quality o f governance rather than a lack o f appropriate constitutional provisions. In Peru, since 2001, the l a w requires a large share (50 percent) ofminingprofits taxes to be plowed back into local communities. Yet little o f these fhds appear to reach the communities, primarily due the federal government’s retaining them for payment o f ancient debts. 40 I Box 5.4 (continued) I InGhana, the constitution explicitly reserves all mineral rights for the state. Despite this, public sentiment has favored local communities receiving a direct share in royalties paid t o the government o f Ghana by mining companies. As a result, the government set up a Mineral Development Fund (MDF), which re- stored a traditional practice o f payments to custodians o f the mining land. The MDF receives 20 percent o f all mining royalties, o f which 9 percent goes to mining communities, which in turn i s subdivided be- tween local authorities. The other llpercent goes to mining sector institutions and mineral-related in- vestment projects. I npractice, however, the discretion given to the Ministry o f Finance in handling the MDF together with the lack o f clear expenditure guidelines for the local authorities has resulted in little benefit to the local communities. The distribution o f o i l rents in Ecuador i s considered the most centralized and least transparent o f the four Andean countries (ESMAP 2000). Over 1995-2000, an average o f 90 percent o f available o i l rents was assigned to the central government and i t s institutions, 62 percent to the central budget, 7 percent to the armed forces, and 23 percent to the universities. Producingprovinces and municipalities averaged 1.2 and 2.4 percent, much below the Andean Countries’ average o f 18.9 percent and 9.5 percent. Although a large share o f local government resources came from other central government transfers, they account for less than 1 percent o f central government expenditures. 1 Sources: Country Case Studies; World Bank I 5.17 Issues relating to distribution o f revenues among owners o f resource rights and different levels o f government f i g u r e d in s i x o f the completed projects in the portfolio -with largely sat- isfactory outcomes - and two active projects relating to the Chad-Cameroon pipeline. T h e six completed projects - in Bolivia, Papua N e w Guinea, and Russia - contained provisions for distribution o f revenues from resource extraction to meet entitlements, compensation, and other national priorities. O f the six completed projects, f o u r had satisfactory outcomes in terms o f achieving their distributional objectives. Revenue Utilization 5.18 Developmentally efficient use o f E1 revenue can stimulate broad-based and sustainable economic development that goes b e y o n d the E1sectors. Approaches to better use o f E1revenues are discussed in C A S s for 6 out o f 26 EI-dependent countries. T h e approaches discussed in the C A S s include: improving capacity for public finance management and developing a strategy for poverty-oriented use o f revenues (Chad), resisting the unwise expenditure o f oil revenues (Azer- baijan), effective management o f resource rents (Mongolia), and directing revenues toward sus- tainable use (Kazakhstan). Once again, there i s little evidence in the C A S s o f lending o r non- lending activities that follow directly from these discussions. Only three active projects relating to the Chad-Cameroon Pipeline contain explicit provisions f o r allocating fiscal revenues fiom extrac- t i v e industries (see B o x 5.5, n e x t page). COORDINATION THE WORLD BANKGROUP ACROSS 5.19 Aside from serving as an instrument for integrating activities within the Bank, the CAS i s also expected to strengthen coordination and cooperation between the Bank and IFCMIGA. How- ever, the review o f C A S s o f EI-dependent countries found that, w h i l e the discussion o f linkages with the Bank’s E1 activities has been v e r y modest, the E1 activities o f IFC and MIGA are not always 41 mentioned, even injoint CASS.’~ Inresponse to a survey question about the coordination across the WBG on important issues affecting the E1 sectors, 52 percent o f Bank staff and 100 percent o f MIGA, but only 48 percent o f IFC staff responded that i t was adequate. In response to a question about factors that constrain the W B G ’ s ability t o help client countries enhance the contribution o f the E1sectors to sustainable development, Bank and MIGA staff tended to point to the inadequate link- age between E1activities and sustainable development (50 percent and 56 percent, respectively, ver- sus 42 percent o f IFC staff), w h i l e IFC staff pointed to the inadequate level o f support from the Bank’s Country Departments and Country Management Units (55 percent versus 52 percent o f Bank staff and 29 percent o f MIGA staff). These findings also point to a need for greater integration o f E1 sectoral and macro interventions i nthe Bank’s assistance strategies, especially for IFC activities. Box 5.5: Applying E1 Revenues to the Right DevelopmentalPriorities Issues related to utilization o f E1 revenues are intertwined with those o f public expenditure policies. However, depending o n the relative importance o f E1revenues and the nature o f developmental and mac- roeconomic priorities, sector-specific strategies need to be devised. InPapua N e w Guinea, a large proportion o f E1revenues went toward non-productive uses inthe 199Os, a period o f poor economic growth for the country. This was due to inadequate institutionalcapacity as well as government preoccupation with macroeconomic imbalances, which distracted i t from the scope and the quality o f public expenditure. Since 2000 the government o f PNGhas been consciously redirecting recur- rent expenditure toward development projects. InEquatorial Guinea, after a long period o f poor economic growth, there have been visible signs o f infra- structure improvements since 1995 that support the o i l and associated service industry,and access roads in agricultural areas. The investment budget -which reflects a 1997 commitment to give priority to es- sential infrastructure and to poverty alleviation through investments in social services and agncultural diversification - i s allocated among administration (20 percent), the productive sectors (1 3 percent), health (10 percent), education (15 percent), and infrastructure (32 percent). While the allocation appears appropriate for Equatorial Guinea’s development needs, muchneeds to be done to develop the capacity o f the sector ministries to implement such a large investment program efficiently. InBolivia and in Ghana, E1revenue enabled the government to increase spending on social programs and begin t o alleviate poverty, but poverty remains entrenched in both countries. I nEcuador and PNG, pov- erty alleviation i s an even more distant hope. In Kazakhstan, poverty assessments were undertaken only in the late 199Os, and their conclusions have been incorporated in W o r l d Bank strategy, but the Bank has little leverage after abundant o i l revenue reduced the government’s commitment to reform. Chad’s ongoing Petroleum Revenue Management Project contains a detailed Revenue Management Plan that allocates prospective revenue from petroleum projects to: poverty-related sectors such as education, health, rural development, and infrastructure (70 percent); civil sector operation expenditure (15 percent); a future generations account (10 percent); and a supplement to the producing region (5 percent). Capac- ity-building and institutional arrangements for transparent allocation and utilization are in process. In Ecuador, a Bank review concluded that most o f the country’s o i l capital was being used to finance government consumption, including widespread overstaffing in the public sector, growth in inefficient public enterprises and l o w levels o f non-oil taxation, and high levels o f subsidies for petroleum. Source: Country Case Studies 74. O f the 60 CASs that were reviewed, 26 covered EI-dependent countries, and 4 o f these were joint Bank-IFC- MIGA CASs. 42 CONCLUSIONS 5.20 At the country level, the majority o f CASs in EI-dependent countries recognized one or more issues related to the management o f fiscal revenues from resource extraction, but in only a few instances i s the discussion linked to specific interventions to address them. Also, the Bank’s overall lending to EI-dependent countries experiencing negative growth has been substantially lower than average, with no indications o f compensating non-lending interventions, 75 and no evaluative evidence on the results o f such interventions. A desk review o f Bank interventions in five EI-dependent countries found that governance was the key to the successful management o f E1revenues and fed into the quality o f revenue distribution and the efficiency o f its use in sup- port o f broad-based and sustainable development. 5.21 The CAS review and the staff survey findings point to a need for greater integration o f E1 sectoral and macro interventions in the assistance strategies. The evidence suggests that the ac- tual level o f coordination was believed to be adequate by only h a l f o f WBG staff, and with in- adequate linkages between E1 activities and sustainable development, and inadequate support from the Bank’s country units emerging as the main areas for improvement. The joint CAS proc- ess, which has not been much used in EI-dependent countries, would appear to be an important instrument to achieve this. 5.22 Taken together, these findings suggest that, while the Bank has been reasonably effective inthe few cases when i t addressed revenue generation and distribution issues at the project level, it has yet to formulate and implement a strategy to consistently transform resource rents into sustain- able development, particularly in the most poorly performing EI-dependent countries where the need i s greatest. Ifthe Bank i s to have a more effective role in such countries, it will likely require government commitment as well as the full leverage o f the Bank to achieve sound fiscal manage- ment as well as a supportive governance framework. The best place to clarify the linkages between resource rents and sustainable development i s the CAS, which can then be usedguide the design o f specific projects and the monitoring and evaluation o f results. 5.23 The strategic approach needs to ensure that project-specific interventions are effectively integrated with a macro-level effort to manage the revenues for sustainable development. Projects and analytical and advisory activities to strengthen policies and institutions to ensure that the man- agement and use o f E1revenues i s efficient and transparent should play a major role. Projects to close uneconomic mines and mitigate pre-existing environmental and social conditions, including the integration o f artisanal and small-scale mining within the formal sector, will also be important where such problems exist. Projects to establish a legal and regulatory framework that i s appropri- ate, stable, and consistently enforced, and that will facilitate the privatization o f ongoing activities should also be expected to make a major contribution. Where the Bank can be confident that the incremental revenues will support sustainable development, i t should continue to promote private investment for sector expansion. 75. Since 2002, the Bank’s LICUS program (see footnote 72) has l e d to the allocation o f additional budget t o eligi- b l e countries for activities designed t o improve the institutional and policy framework. 43 6. Addressing the Challenge o f Governance 6.1 Highdependence on revenues fiom extractive industriesh as been associated with corrosive effects on economic and political l i f e in many countries, including rent-seeking and government ineffectiveness. Indeed, a review o f the literature and feedback f i o m NGOs suggest that good gov- emance i s central to creating an environment that fosters sustainable and equitable development, and i s an essential complement to sound revenue management and safeguard policies. Figure 6.1 shows the association between the quality o f governance and E1dependence. 76 Figure 6.1 : Worse Country Governance with Greater El-Dependence 0 20 40 60 80 100 Average El Exports I Total Exports, 1990-99 (%) ’ * “Composite” GRlCS (Governance Research Indicator Country Snapshot) I ranks are a simple average of individual GRlCS rankings for 2000/2001 for ‘ Voice and Accountability, Political Stability, Government Effectiveness, I Regulatory Quality, Rule of Law and Control of Corruption. : Source: h~tp://www.worldbank.o~/wbi&o~ernance/pdf/2001 kkzchar!s.xls 6.2 Countries such as Botswana and Chile” have successfully leveraged their wealth into sustainable growth through investment-friendly policies, fiscal discipline, and long-term plan- ning. While the highest quality o f overall and sectoral governance may not be required for an E1 project to be beneficial to a client country, some minimum conditions should exist to help ensure that the benefits o f E1projects are not squandered and the citizens left with costs that can include environmental damage, health risks, and war. 6.3 Governance, defined as the manner in which power i s exercised in the management o f a country’s economic and social resources for development, has been an explicit concem for the World Bank at least since 1990, when the Bank’s General Counsel articulated the legal basis for 76. This relationship, which i s statistically significant at the 95 percent confidence level (t-statistic = 2.44), illustrates a conclusion that is widely accepted in the literature. N o claim i s made that E1dependence i s the sole determinant o f a country’s quality o f governance. The figure includes a l l countries eligible for borrowing f r o m the WBG with a population greater than 1 m i l l i o n as o f 2000, for w h i c h data i s available. 77. In Figure 5.1, Chile and Botswana are shown at the top, near center and t o the right hand side, respectively. 44 i t s work in this area. This was followed by a Board Paper on “Governance and De~elopment”’~ that outlined the Bank’s general approach to improving governance. Before this time, the Bank had undertaken many initiatives that addressed institutional and policy aspects related to govem- ance. These included projects to reform public sector policies and institutions, and to create an enabling environment for private sector development. Since the early 1990s, much effort has been devoted to strengtheningcomplementary process-oriented aspects o f governance, including public participation, information disclosure, promoting transparency, and reducing corruption. AND TRANSPARENCY PROJECT COMPONENTS RELATING TO GOVERNANCE 6.4 The Portfolio Review found that about 41 percent o f extractive industry projects had at least one component that bears directly or indirectly on improving governance and transparency. The relevant project components address sectoral governance issues such as (i) the institutional andpolicy framework and related capacity-building for clarification o f property rights, and im- proved accounting and auditing standards and practices; and ( ii) strengtheninggovernanceproc- esses, including public consultation andparticipation, information disclosure and dissemination, promoting transparency, and reducing corruption. 6.5 Institutional and Policy Framework: Property rights issues relatingmainly to clarification and administration o f exploration rights and access to pipelines were addressed innine completed and five active projects, and had generally satisfactory outcomes. Cadastre and registry systems were formulated or upgraded (Argentina, Ecuador, and Peru) and institutional capacity was im- proved for enforcement o f laws and regulations, as well as for administering mine titles (Albania, Bolivia, Guinea, Peru, Russia, Zambia). Ongoing efforts among active projects included strength- ening mining cadastral systems and related institutional capacity (Madagascar, Mozambique, Ro- mania). In addition, components addressingthe management ofJiscaZreuenues were included in 10 projects as noted in para. 5.12. 6.6 Public Consultation and Participation: Consultative and participative decision-making processes involving all important stakeholders -local community, government, and industry- have recently emerged as important in a strategy to strengthen governance processes. I nthe port- folio o f completed projects, public consultations o f varying levels and in different forms, beyond the minimum requirements o f the Bank’s EA policy (see para. 4.29 ff.) were undertaken in only four projects. The Bolivia-Brazil gas pipeline project involved the creation o f community-based organizations and committees, and consulting the public on draft regulations and the project’s environmental assessment. The Georgia Oil Institution Buildingproject, provided for training in stakeholder analysis and public consultation to maximize public participation in environmental decision-making. Duringthe India Jharia Mine Fire Control project, effective public consultation processes included concerned state govemment, union leaders, tribal communities, and NGOs. The Russia Coal Implementation TA Project provided support for stakeholders’ participatory activities, especially local trade unions and the Association o f Mining Cities. 6.7 Among the active projects, the Chad-Cameroon Pipeline project has involved public con- sultations in the preparation o f the project’s Environmental Assessment and Environmental 78. World Bank. 1992. Governance and Development. World Bank, Washington, D.C. 45 Management Plan. Extensive and frequent public consultation has also taken place on the subject o f likely project impacts and compensation measures. Compensation rates for all crops, trees, and other assets have been well researched and discussed with affected people in all categories o f land tenure. The private sponsors will pay compensation at real market values, which are over and above government schedules. 6.8 Overall, while recourse to public consultation and participation has helped project imple- mentation where i t was carried out, it was quite rare across the portfolio o f extractive industries projects. This i s an important gap in a sector where production and rehabilitation activities directly affect the livelihood and environmental and social well being o f large numbers o f people, and where sharing ofbenefits needs to be done in a cooperative and transparent manner to prevent the dangers o f rent-seeking behavior. The prominent examples o f public consultation have occurred in nlight o f this finding, countries with relatively higher levels o f education and per capita incomes. I it would be important to develop suitable mechanisms to ensure that affected people who are less literate and economically weak are given appropriate and fair means to register their feedback on issues that effect them. The provisions established for the Chad-Cameroon projects represent a par- ticularly important pilot experience in this area. 6.9 Disclosure and Information Dissemination: Public disclosure and information dissemha- tion, including conduct o f opinion surveys, figured inonly six completed projects. Opinion surveys o f project beneficiaries were conducted in six projects inAlbania, Peru, Poland, and Ukraine. Pub- lic information and communications campaigns were mounted with six completed projects in Al- bania, Bolivia, Peru, Poland, and Zambia, with mixed results. Among active projects, the fourpro- jects associated with the Chad-Cameroon Pipeline contain exemplary provisions for public disclosure and information dissemination.” 6.10 InAlbania, as part o f the Structural Adjustment Credit project (inwhich miningwas only one component), the government conducted a survey o f citizens’ satisfaction with services, gov- ernance, and institutional reform strategy and received generally favorable feedback. A survey o f beneficiaries and stakeholders was made under Poland’s Coal SECAL I and I1projects, while Poland’s government also initiated an intensive dialogue with representatives o f local govem- ment, labor unions, and NGOs. In the Ukraine Coal Pilot and Coal SECAL projects, an inde- pendent institute was involved in monitoring social rehabilitation efforts with affected parties, and obtained generally positive feedback from project beneficiaries. A public opinion survey was conducted following the Privatization Adjustment Project in Peru. 6.1 1 A public information campaign was mounted in Poland’s Hard Coal SECAL I and Alba- nia began a program to survey citizen’s satisfaction with key public services, and publicized re- views o f the impact o f each element o f i t s governance and institutional reform strategy (Albania Structural Adjustment Credit project). Following a controversy with i t s mapping work, the Ec- uador MininglEnvironment TA project began a dissemination effort to present scientific facts 79. F o r example, the Bank has set up a project web site with a comprehensive set o f documents including: (i)the Project Appraisal Documents for the three projects, ( ii) the full set o f Environmental Assessments and Environ- mental Management Plan documents, ( iii) L o a n and Credit Agreements, (iv) Environmental Compliance Moni- the toring Group and International Advisory Group reports, and up-to-date progress reports o n project implementation. M a n y o f these reports are in English and French t o make them more broadly accessible. See http:www. worldbank.org/afi/ccproj/proj ecdpro-document. htm. 46 through various public forums. Bolivia’s public information campaign on the benefits o f the re- form was not sufficient or effective enough to answer public criticism o f the Regulatory Reform and Capitalization projects regarding benefits o f newly capitalized firms. Zambia’s efforts to produce an NGO policy paper proved insufficient to bridge the gap between the complex groups o f NGOs and the government. Ukraine failed to respond adequately with appropriate information or disclosure to damaging reports in the media on the conduct o f coal sector reform, and in the process, may have invited political opposition to the reform process. 6.12 Promoting Transparency and Reducing Corruption: Promoting transparency and reduc- ing corruption did not figure as explicit objectives in any o f the completed projects that were re- viewed, with the exception o f the Russia Coal SECAL I and I1projects. However, some techni- cal assistance components, such as those relating to accounting standards, biddingprocesses, and better management practices, had the effect o f improving transparency, some o f which may have lasting effects. There was one instance o f misuse ofproject funds that was eventually addressed. Overall, 16 projects had components related to transparency or corruption, some o f which were minor in scope. 6.13 An important objective o f Russia’s Coal SECAL I and I1projects was the establishment o f a transparent mechanism for the allocation and effective monitoring o f subsidies. Duringthese pro- jects, the Government o f Russia took a series o f radical and far-reaching steps that enhanced trans- parency and accountability through transfer o f subsidy administration to govemment ministries and creating mechanisms for direct payment o f entitlements to individuals and job creation pro- grams to local administrations. 6.14 The Bank’s funding for Peru’s Committee for Promotion o f Private Investment (COPRI) helped i t function with greater independence during the sale o f state-owned enterprises (Peru’s Privatization Adjustment project) and open and transparent bidding was used for the first time for petroleum imports, which helped to reduce costs o f petroleum purchases (Petroleum Sector Reform project). Transparency was improved through upgrading accounting and auditing proce- dures during Azerbaijan’s Petroleum TA, Thailand’s Gas Transmission project, as well as under Madagascar’s Petroleum Sector Reform project. 6.15 A notable achievement o f the PeruEnergymining TA was that the government and public have accepted the concept o f autonomous regulatory operators with stable and non-discriminatory rules. The hnds for the Miners’ Separation Package (MSP) scheme under Poland’s Hard Coal SECAL were properly accounted for through audits, and accountability o f mining companies was improved through more transparent company business plans and operating plans. 6.16 In the Ukraine Coal SECAL, the small business component saw some fraud in applica- tions for micro-credit and employment subsidies, but follow-up measures to prevent recurrence were effective. Some administrative problems were encountered during audits o f the employ- ment restructuring funds and mine liquidation funds in Poland’s Coal SECAL I ,and were satis- factorily resolved, and it was confirmed that the funds had been used properly. 6.17 There were some less successful experiences, as in Zambia’s Second Economic and So- cial Adjustment project where bilateral donors suspended program lendingbecause o f their con- cerns about governance issues. The Bank’s sector policy initiatives in Russia helped underline the importance o f institutional regulations surrounding transparent allocation o f quotas and ac- 47 cess to export pipeline facilities (Oil Sector Rehabilitation Iand I1projects), though a draft law for this purpose fell short o f expectations. Albania’s Anti-Corruption Plan supported an array of measures to increase transparency, such as deregulation, more transparent privatization and l i- censing procedures, public administration reform, and judicial reform, which had an impact on all sectors, including hydrocarbon and mining. 6.18 In Bolivia’s Regulatory Reform and Capitalization Assistance projects, detailed asset valuation helped set a benchmark to ensure a fair bidding process and the privatization process were considered most transparent by investors. However, the government’s scheme for sharingthe proceeds o f capitalization with specified sections o f the population was marredby cases o f fraud by claimants who falsified their ages to claim benefits. During the Guinea Mining Sector Invest- ment Project, the Ministry o f Mines negotiated mining rights with potential private investors in a non-transparent way, in respect o f bauxite and alumina concessions, especially for the DianDian deposits. Though outside the scope o f the project, these actions could well have affected the inter- est o f potential investors for activities undertakenwithin the ambit ofthe project. However, on an- other count, budgetarytransparency was improved by the elimination o f the Agency for the Man- agement o f Mines Infrastructure (A”). Under the Mongolia Coal Project, modem financial accounting, budgeting, and cost accounting have been introduced and adopted. 6.19 Overall, the scope o f the project components relating to governance and transparency tended to be narrow, relating to specific steps in the sequence o f project-related activities. In most cases, the link with better governance and transparency was incidental, and did not follow from a stated objective o f the project. None o f the projects have any stated objectives dealing with larger govemance or transparency issues, though these are recognized in many CASs. One reason for this could be the political sensitivity o f this subject, making it difficult to convince client countries to adopt specific objectives in this regard. Another possibility is that these issues, being common to many sectors, may need to be dealt with at the macro level rather than through sectoral interventions. AT THE COUNTRY LEVEL ADDRESSING GOVERNANCE 6.20 Since major governance issues are most likely to be addressed through interventions that are not directly tied to E1projects, the Govemance Study was undertaken to review the World Bank’s assistance to six EI-dependent countries*’ -Chile, Ecuador, Ghana, Kazakhstan, Papua N e w Guinea, and Tanzania - in light o f macro and sectoral governance problems. The study sought to understand the degree to which the Bank i s factoring govemance into i t s sectoral ap- proach through governance-focused ESW, a govemance-informed sectoral assistance strategy and the design o f projects. The study also makes an important distinction between macro and sectoral governance. 6.21 M a c r o Governance: Governance at the macro level covers all aspects o f exercising au- thority through formal and informal institutions in managing a state’s resources for sustainable development. Thus, the elements o f macro governance include creating a favorable climate for economic growth, transparent budgetary and financial management, transparencyinthe political 80. The six countries were chosen for variation in region, size and importance o f the E1sector, quality o f govern- ance, and intensity o f Bank intervention in the sector. 48 process and a voice for all citizens, while providing them with effective social and environmental services. Many indicators have been developedfor measuring the quality o f macro govemance in terms o f i t s performance and process. Each indicator tends to cover one or two aspects o f macro governance, and the viewpoint o f one or more important stakeholders -the government, civil society, or the business community. The World Bank Institute’s Governance Research Indicators (GRICS) estimates six dimensions - voice and accountability, political stability, government ef- fectiveness, regulatory quality, r u l e o f law, and control o f corruption.*’ 6.22 Sectoral Governance: Incontrast to macro governance, sectoral govemance inthe context o f the E1sector i s more closely concemed with a satisfactory legal, regulatory, and institutional framework to manage environmental and social risks, involving and protecting local communities against negative impacts o f E1activities, including abuse o f individual rights,82 ensuring investor compliance with the law, and protecting investor contractual rights. This requires that appropriate environmental, financial, and compensation regulations exist and are enforced, with the effective participation o f the local communities, while the rights o f investors are respected. The structure and process o f good sectoral govemance can be ensured through government capacity buildingand appropriate policy, legal, and institutional reforms, preferably inthe overall context o f good macro governance. In the absence o f indicators specific to sectoral governance, they may need to be de- rived from those for macro govemance, but extra efforts may be needed to tailor them to the spe- cific situations and for data collection. From Governance Awareness to Project Design 6.23 The Govemance Study found that most o f the Bank’s E1projects are not the result o f a governance-informed sector strategy. There i s no indication that the decision to support increased investment or structural adjustment loans was preceded by an analysis that considered the likely governance benefits and risks of such investments. At the same time, it is recognized that most o f the E1projects under review pre-date the Bank’s sharpened focus on governance inthe later 1990s. 83 The Bank’s apparent lack o f integration o f governance concems into the lending program i s re- flected inrecent OED Country Assistance Evaluations (CAEs) covering the 1990s that found fault with the Bank for a belated, indirect, or muffledresponse to obvious govemance issues inEcuador, Ghana, Kazakhstan, and Papua N e w Guinea. 6.24 Papua New Guinea (PNG) presents a rare case where a link can be discerned between govemance ESW, a governance-informed strategic approach to the E1sectors set out inthe CAS, and the design o f E1projects in the period under review. Both o f PNG’s Petroleum TA projects 8 1. For additional information o n GRICS, see http://www,worldbank.org/wbilgovernance/data.html#dataset2001 82. Since abuse o f individual rights, mostly in connection with site security arrangements for project sites, has been alleged in connection with some E1projects -albeit none in connection with projects in the Bank portfolio under review -the B a n k needs to consider i t s position o n these issues. While extractive industry leaders and some gov- ernments subscribe to Voluntary Principles o n Security and Human Rights, the B a n k has n o comparable guidance. 83. Inrecent years, the Bank’s governance-related public expenditure and financial accountability sector work has rapidly evolved. Public Expenditure Reviews (PERs), Country Financial Accountability Assessments (CFAAs), and Country Procurement Assessment Reviews (CPARs) are n o w part o f core economic and sector w o r k in a l l borrow- ing countries. Follow-up t o these core diagnostics in terms o f policies and institutions and capacity building i s part o f regular C A S preparation discussions. 49 pre-dated the Bank’s increased focus on govemance. But despite the success o f these projects in buildingPapua New Guinea’s petroleum sector, OED’s CAE found that “progress in managing the growth o f the o i l & gas industry has not led to sustained economic benefits to the country because o f macroeconomic mismanagement o f o i l revenues” and recommended that “the Bank should intensify i t s non-lending assistance, but restrain i t s lending services.” Although both later operations, the 2000 Mining Sector Institutional TA Project and the 2000 Gas Development TA Project, are primarily intendedto increase private investment intheir respective sectors, they also include components to address macro and sectoral govemance issues.84 The Govemance Study, however, found no indication that the Bank considered the likely benefits o f such increased in- vestment in light o f govemance risks. 6.25 In Kazakhstan, while a public sector reform loan achieved the technocratic reforms it sought, but did not achieve i t s stated purpose o f improving the effectiveness o f resource mobili- zation and the efficiency o f the use o f resources because o f the absence o f system-wide checks and balances.85Papua New Guinea and Kazakhstan are not isolated cases. 6.26 The findings o f the Govemance Study are broadly similar to those o f the Stakeholders’ Survey, but WBG staff involved in E1projects and countries tend to be more sanguine. The Sur- vey o f Participants in the EIR’s Stakeholder Workshops found that, while 83 percent o f respon- dents expressed a need for the WBG to become involved in improving governance and transpar- ency, only 41 percent felt that the level o f effort and 26 percent that the level o f success had been adequate. The survey o f WBG staff found that 90 percent o f respondents felt that improving governance and transparency in EI-dependent countries was important, and 64 percent that these issues had been adequately addressed in projects. Here again, the survey findings confirm that there i s room for significant improvement in strengtheningthe linkage between E1activities and governance issues. Sequencing E1Lending v i s - h i s Improved Macro and Sectoral Governance 6.27 Inpursuing lending interventions in E1without paying sufficient attention to govemance, the World Bank risks a situation where a country i s unable to capture the benefits or control the risks. Historically, the Bank’s approach to the E1 sectors has promoted private investment for sector expansion as a major objective on the basis that state enterprises inthe sector had not been managed to maximize productivity and were subject to corruption and political interference. The rationale was that private sector development was desirable because it would be better managed, and produce more fiscal revenue; but no explicit linkage was made to the efficient use o f these revenues. This focus on expanding production through PSD pre-dates the institutional changes in the late 1990s that allowed govemance to be diagnosed, analyzed, and considered, and it may pre-date much o f the debate on the development impact o f E1sectors. 84. The Mining TA project includes, among others, components for (a) policy and regulatory institutional strength- ening o f the Department o f Mining, and (b) institutional strengthening and capacity building for the Intemal Reve- nue Commission. The Gas TA project includes, among others, components to (a) enhance the monitoring and regu- latory capacity o f the Department o f Petroleum, and (b) facilitate the participation o f local communities. 85. Notably a weak legislature and civil society, lack o f freedom for the media, and lack o f transparency o f public accounts. 50 6.28 The Bank has no strategy for sequencing govemance interventions in the E1sectors or coordinating them with work done in other sectors, Instead, the sequence o f Bank actions has been shaped by the institutional evolution o f i t s understanding o f the issues and i t s mandate. As a consequence, where the Bank sought to increase investment in the E1sectors, i t pursued this ob- jective either before supporting better risk management, or simultaneously.But as the experience in Papua New Guinea and Kazakhstan illustrates, working to establish the prerequisites for good development outcomes from E1investments inparallel with, or after supporting expansion o f the sector, poses a major challenge and i s a high-risk strategy in countries with poor macro and sec- toral governance. 6.29 Finally, countries are likely to be less receptive to improving govemance in revenue and safeguards after the major investments have beenmade and incremental revenues are flowing. Yet no awareness o f such logic i s evident inthe portfolio under review, nor i s there any indication from ESW that the World Bank considered a sequencing o f i t s interventions to mitigate the attendant risks. The decision to focus the policy dialogue with Equatorial Guinea, Kazakhstan, and Papua N e w Guinea on governance issues came after private investments in resource development had made the Bank unimportant as a source o f finance. At least in hindsight, the experience in these countries points to the need for the Bank to develop a more selective and sequenced approach that takes macro and sectoral govemance issues into account and gives priority to improving manage- ment o f existing sectoral revenue flows and environmental and social risk, ahead o f promoting new investments in expanding the E1sector. Altematively, effective measures need to be taken to en- sure that revenues from new production are used to promote development and reduce poverty. CONCLUSIONS 6.30 While the Bank has long been aware o f the importance o f addressing the governance challenge for ensuring the transformation o f resource rents into sustainable development, there is little evidence o f sector-specific govemance strategies in CASs o f EI-dependent countries. The Bank’s project-level interventions tend to be sporadic and narrow in scope, with few cases where a link can be discemed between these interventions and governance ESW or a governance- informed strategic approach to the E1sectors set out in the CAS. Where some links can be ob- served, as in Papua N e w Guinea and Kazakhstan, their experience suggests that governance i s - sues take a long time to address, and working to establish good governance in parallel with, or after supporting increased investment in E1is a high-risk strategy in countries with poor macro and sectoral govemance. 6.3 1 The priority o f supporting increased investment in the E1sectors needs to be based on an assessment o f the quality o f macro and sectoral governance. Where sectoral govemance i s poor, the Bank may focus i t s efforts on helping the borrower better capture the benefits and control the risks o f E1projects inpreparation for greater investment.Where macro govemance i s also weak, however, the Bank’s decision to support sectoral reforms must be undertaken strategically with an understanding o f their likely impact. 6.32 To assess the quality o f macro and sectoral govemance, the Bank needs to develop ap- propriate diagnostic instruments that take key indicators into account, supplemented by addi- tional analysis. Key indicators o f macro governance relate to the quality ofpublic financial man- 51 agement and r u l e o f law,86as a measure o f the government’s ability to address problems through institutional reforms. At present, while there i s substantial Bank ESW focused o n the quality o f public financial management, there i s no diagnostic instrument to evaluate the rule o f law or the quality o f sectoral governance. B o t h o f these gaps would need to be addressed for the Bank to be able to take macro and sectoral governance into account, at least in EI-dependent countries. 6.33 Given an assessment o f the quality o f macro and sectoral governance, a three-tiered ap- proach would seem appropriate: 0 For countries with sound macro and sectoral governance, the Bank should support the country as needed to attract investment to expand the sector or further improve manage- ment o f resource revenue flows and environmental and social risks. 0 For countries with sound macro governance and weak sectoral governance, the Bank should focus i t s support o n strengthening sectoral governance, including management o f environmental and social risks, and only support significant sector expansion inconjunc- tion with adequate provisions to compensate for sectoral governance weaknesses. 0 For countries with weak macro and sectoral governance, where that the government lacks the ability to manage revenues well, increased investment designed to augment government revenues will have little benefit, and the Bank should focus i t s support o n the strengthening o f governance and the management o f environmental and social risks8’ The promotion o f investments for significant sector expansion should be avoided, except where the Bank can adequately mitigate the risk that fiscal revenues from new invest- ment may not be used for the country’s development priorities. The Chad-Cameroon model represents an important test case for such a holistic approach.88 86. That is, the use o f public power in accordance with l a w 87. For example, through analytical and advisory activities ( M A ) , technical assistance projects, and other instru- ments that are primarily aimed at strengthening governance and management o f environmental and social risks. 88. Given the Bank’s very modest record with fiscal revenue management inEI-dependent countries (see para. 5.8) the number o f such “test cases” i s expected t o be small. 52 7. Recommendations 7.1 H o w effectively has the World Bank assisted i t s client countries in improving the contri- bution o f the extractive industriesto sustainable development? On the one hand, with i t s global mandate and experience, comprehensive country development focus, and overarching mission to fight poverty, the Bank is well positioned to help countries overcome the policy, institutional, and technical challenges required to transform resource riches into sustainable benefits, and its achievements are many. Overall, nearly 80 percent o f the Bank’s E1projects had at least moder- ately satisfactory outcomes, and the performance o f this portfolio has been consistently and sig- nificantly above Bank-wide averages in terms o f outcome, institutional development impact, and sustainability. The Bank’s research made major contributions to broadening and deepening un- derstanding o f the disappointing performance o f resource-abundant countries. I t has helped set standards in the formulation and implementation o f guidelines for the mitigation o f environ- mental and social impacts. More recently, i t has begun to address the challenge o f govemance with a variety o f innovative tools. 7.2 On the other hand, the Bank can do much more to further improve i t s performance in en- hancing the E1sector’s contribution to development and poverty reduction. The main areas for improvement are: (i) formulating and implementing integrated corporate and country level strategies for addressing the broader developmental issues that lie at the heart o f many resource- rich countries’ inability to achieve sustainable development; (ii) strengthening the implementa- tion o f the Bank’s projects based on i t s policies for the mitigation o f environmental and social impacts, and for monitoring and reporting o f economic, environmental, and social results; and ( iii) engaging stakeholders to develop stronger and widely accepted governance frameworks to assist the transformation o f resource endowments into sustainable development. 7.3 Given the size and complexity o f the World Bank Group, and the diversity o f issues that need to be addressed, it is expected that the responsibility for following up on these recommen- dations will not rest exclusively with the sector specialists in the Energy and Mining Sector Board and the Oil, Gas, Mining and Chemicals Global Products Group.89 P Recommendation1: Formulatean IntegratedStrategy. The Bank has not devoted enough attention to the developmental needs o f the poorly performing resource-abundant countries, many o f which experienced negative growth during the 1990s. To address this gap, the Bank Group needs to formulate and implement integrated strategies, at both the corporate and country levels, for transforming resource endowments into sustainable development. Such an integrated strategy will start with the presumption that successfbl E1 projects - whether financed by the Bank or not -have to provide revenues to governments, mitigate negative environmental and social effects, and benefit local communities. I t will also need to address govemance squarely and help to ensure that E1 revenues are effectively used to support development priorities. I t will also require much better cooperation within the WBG and with other stakeholders. 89. The Management Response i s expected to identify the unit(s) responsible for following up o n each recommendation. 53 (a) Formulate a sector stratem: The Bank, together with other members o f the World Bank Group needs to design and implement a sector strategy that closely integrates resource extrac- tion with sustainable development through the effective management o f E1revenues in support o f developmental priorities and the reliable mitigation o f adverse environmental and social im- . ~ ~ macro and sectoral governance are weak, the Bank’s assistance should focus on p a c t ~Where strengthening macro and sectoral governance. Insuch cases, the Bank should carefilly assess and report on the risks that E1fiscal revenues may not be used for development p r i ~ r i t i e s .The ~’ Bank should not support significant sector expansion unless it can adequately mitigate these risks.92Where macro governance i s sound but sectoral governance i s weak, the Bank should focus on improving sectoral governance. 6)Address extractive industries in CASs; For all resource-rich countries the Bank should ex- plicitly address extractive industries inthe CASS.’~ The CAS should discuss the sector’s econ- omy-wide linkages (such as the importance o f government revenues, their management, and distribution) and reference the underlying governance assessment. This should guide f i t u r e project design, facilitate monitoring and evaluation, and provide an agreed framework for WBG-wide coordination and collaboration in the E1sector. fc) Promote governance - improvement where governance is weak: The Bank should compen- sate for the lower level o f lending that may be appropriate for resource-rich countries with weak macro and sectoral govemanceg4 by devoting greater management attention and admin- istrative budget for advisory and analytical activities aimed at improving the policy, institu- tional, and governance framework for EI. This would enable the Bank to establish and main- tain continuity o f engagement and facilitate a quick response to opportunities for assistance when they arise. 95 (d) Support private sector development and environmental sustainabilitv: Inall countries, the Bank should be ready to support the closure o f uneconomic mines, reform and privatization o f state-owned enterprises, and mitigation o f pre-existing environmental and social prob- lems. Where appropriate, the Bank should help integrate artisanal and small-scale mining (ASM) with the formal sector and internalize their environmental and social impacts, while at the same time creating alternative employment opportunities and supporting the consolida- tion o f ASM activities for greater efficiencies and economies o f scale. 90. Aspects to be addressed should include, inter alia, k e y policy issues, the Bank’s role, and business implications (including resource issues and WBG coordination). 9 1. Management accepts the need t o factor governance into its support for extractive industry activities and will w o r k t o improve its approaches, based o n country circumstances. However, it does not feel that mandating for an entire set o f countries a specific program to ensure that fiscal revenues are used for development priorities would be a practical solution. 92. “Significant” should be considered in both absolute terms and in relation to total sector production, based o n analysis o f past experience, and may vary by country. nthe Poverty Reduc- 93, Inresource-rich countries, the WBG should also encourage client countries to include E1i t i o n Strategy Papers. 94. In line with the Bank’s performance-based allocation o f IDA credits. 95. This recommendation is consistent with the L I C U S approach mentioned in para. 5.22. 54 P Recommendation2: Strengthen Project Implementation. The Bank needs to strengthen the implementation o f i t s existing policy framework and ensure that i t remains up to date in line with evolving needs. Given the potential impacts o f resource extraction and the controversy surrounding the sector, rigorous implementation o f safeguard policies i s a minimum requirement for i t to operate in a world concerned with sustainable development. In addition, in light o f growing concerns about the sustainability o f EI-based development, the Bank needs to more systematically define, monitor, document, and report on the economic, social, and environmental impacts o f i t s projects. Specifically, the sharing o f benefits, identified by many stakeholders as a very important issue for resource extraction, needs to be explicitly monitored and evaluated. {a) Improve upstream project screening: The Bank should provide clearer and more consistent guidance for the categorization o f sectoral adjustment and technical assistance projects, the identification o f applicable safeguards at the initial project screening, the appropriate scope and nature o f the EA instruments, and the reporting and evaluation o f safeguards implementation. This needs to be followed up through the entire implementation framework, from good prac- tice guidelines to appropriate monitoring and training. e)Provide for adequate specialist involvement at evew stage: The Bank should strengthen the implementation o f i t s safeguard policies by providing adequate resources for the participation o f qualified environmental and social specialists at the preparation, appraisal, and supervision o f all projects that are likely to have adverse impacts. This will ensure that such impacts are adequately addressedthrough the upstreamdesign o f appropriate mitigation strategies or pro- ject altematives, as well as through the retrofit o f timely remediation measures should unex- pected impacts materialize during project implementation. (e) Enhance reDortina of results: The Bank should strengthen the implementation o f i t s com- pletion reporting requirements by (i) ensuring that project completion reports include the cal- culation o f an ex-post economic rate o f return or net present value or, where that i s not feasible, a cost-effectiveness analysis to determine whether the project represented the least- cost solution to attain its objectives; and (ii) preparing an activity completion summary for every significant non-lending activity. (d) Evaluate the sharing of benefits: At appraisal and project completion, the Bank should systematically estimate the distribution o f project benefits among different stakeholder groups - government at different levels, private companies, and local communities - evaluate i t s sensitivity to different scenarios, and discuss its acceptability with key stake- holder group s. P Recommendation 3: Engage the Stakeholders. Often in collaboration with other organizations, the Bank has brought together diverse stakeholders in extractive industries to address issues at the local, national, regional, and global levels. The Bank’s convening role has been actively sought and has been significant because o f its access to all stakeholders, private and public development experience, and ongoing involvement with project investment and technical assistance in the sector. But the Bank has inadequately addressed some areas - notably governance and revenue management. The Bank’s performance in these areas can be enhanced through improved consultation with stakeholders, including local communities, and 55 by systematically and transparently reporting on key sustainability indicators. Such an approach i s also likely to raise standards and practices o f the sector as a whole. (a) Update policvframework: Inconsultation with its stakeholders, the Bank should periodi- cally adjust i t s policy framework for extractive industries to ensure that they remain up-to- date with evolving industry practice. I t should resolve remaining inconsistencies within the WBGg6 and address identified gaps.” I t should also recognize the expandingawareness ofthe human rights dimension o f Bank policies and projects, and explore possible avenues for ad- dressing the issues, especially where i t lags industry best practice. (b) Promote disclosure qffiscal revenuesfrom EI; The Bank should vigorously pursue coun- try- and industry-wide disclosure o f government revenues fiom E1and related contractual ar- rangements (such as production sharing agreements, concession andprivatization term^).'^ I t should work toward and support disclosure o f E1 revenues and their use in resource-rich countries. fc) Define and monitor sustainabilitv indicators: Together with other stakeholders, the Bank should define indicators o f economic, social, and environmental sustainability,9’ establish base- line data, provide for adequate monitoring over the life o f the project, and report and evaluate on the results during supervision and in project completion reports. The Bank should also en- courage more independent outside monitoring, ideally using local capacity (that may have to be developed). fd) Increase local communitv participation: The Bank should support enhanced community consultation and participation throughout the l i f e cycle o f EI-projects. The Bank should assist countries to increase involvement by local communities inE1decision-making processes, and ongoing consultation throughout the project l i f e cycle, including closure. 96. Such as o n mine closure, safety o f darns, forced and child labor. 97. Such as those related to consultation and disclosure, community development, security, hazardous materials management, acid rock drainage, gas flaring, and transportation o f oil, for which the good practice guidelines that have been issued need to be complemented by supporting language in the policies. 98. Several stakeholders have already sought IMF and WBG assistance in advocating or requiring disclosure and in developing a reporting framework. 99. Such indicators could include, for example, health and safety statistics, gas flaring (or greenhouse gas emis- sions), adequacy o f mine closure preparations (including finding) and o i l transportation arrangements, hazardous materials management and emergency response plans, availability o f infrastructure and services (e.g., health and education), and revenues generated for governments. 57 Annex A A n n e x A: Portfolio o f Extractive Industries Projects: FY93-FY02 EA Project Loan WB Project Title Region Country Lending Instrument FYAP pleted FYCom- Cate- gory Cost (US$M) (ts Petroleum Technical Assistance II AFR Technical Assistance 1993 1998 C 3 3 Guinea Calub Energy Development AFR Ethiopia Specific Investment 1994 2001 A 14 14 AFR Madagascar Sector Investment and 1993 5 Petroleum Sector Reform 1999 B 6 Maintenance Loan Annex A 58 I Oil & Gas: Active Projects I Lending In- FY Ap- Environmental Project Cost at Bank Loan at Title Region Country strument. proval A ~ ~ (US$ M) ~ Appraisal Appraisal ~ ~ ~ Global Envi- Oil Spill Contingency AFR Africa ronment Facility 1999 C 5 3 GEF) Petroleum Environment Capacity AFR Cameroon Technical 2000 C 11 6 Enhancement Project Assistance Chad/Cameroon Pipeline AFR Cameroon :::l: n 2000 tA In- 3500 90 Specific In- 1991 C 14 22 Chad Petroleum Power Engineering AFR Chad vestment Emergency Oil Spill Mitigation ECA Russian Fed- Emergency C 140 99 eration Rehabilitation 59 Annex A Project Country Lending In- FY Ap- FY Com- Env. Assessment Cost Bank Loan Title Region strument proved pleted Category (US$ M) (US$ M) Mining Sector Development & AFR Ghana Specific In- 1995 2002 B 13 9 Environment vestment Mining Sector InvestmentPromo- AFR Guinea Technical As- 1996 2001 C 16.8 23 tion sistance Mining Sector Development AFR Tanzania ~~~~~~' As- 1995 2002 B 13 12 Second Economic and Social AFR Zambia Structural Ad- 1996 1998 U 90 90 Adjustment Credit justment Econ. Recovery and Inv. Promo- AFR Zambia Sectoral Ad- 1996 1998 C 140 140 tion Credit justment PublicSector Reform and Export AFR Zambia Structural Ad- 1999 2001 U 170 170 Promotion Credit Project justment Economic Transition Support EAP Mongolia ~ ~ 1994 ~ 1997~ ~U ~ 26 ~ 23 O n Annex A 60 61 Annex B Annex B. Extractive Industries-Dependent Countries I Oil & Gas I Average Oil & Gas Population Country Population below POV- GNIICapita’ Average Share 2000’ GDPlcapita growth’, of Total Exports’, edy“ (US$: 1999) (millions) 1990-99 (%) 1990-99 (%) Line 1%) hemen I 89.0 I 17.5 I 19 I 390 I 1.46 /Cameroon I 33.5 1 14.9 1 40 1 600 1 -2.1 1 1 I I I 35 I I I ~~ ~ ~ _ _ _ _ _ _ _ _ IEcuador 30.4 12.6 1330 -0.27 I 1 I 23 I I I ~~ hlgeria 28.7 30.4 1540 ~ -0.49 IKazakhstan I 23.1 I 14.9 I 35 I 1290 I -4.36 I [Papua New Guinea I 20.0 1 4.8 I .. 1 770 1 2.26 I brinidad I Tobago I 16.3 I 1.3 I .. I 4660 I 2.01 I IRussian Federation I 16.2 I 145.6 I 31 I 1750 I -4.9 I berbaijan I 15.8 1 8.0 I 68 1 570 I -2.18 I bietnam I 15.8 I 78.5 I 51 I 370 I 5.51 I IColombia I 14.7 I 42.3 I 18 I 2150 I 0.92 I ’ Sources: ’World Bank and International Finance Corporation (2002); World Development Indicators, Central Data- base, World Bank. World Development Indicators, World Development Report 2003; ‘I..” : Not Available. Annex B 62 I Mining Country Average Mining 2 Population Average Share of Total $ ~ Pov- GNIICapita' p ~ ~ ~ ~ ; below GDPIcapita Exports', erty (US$, 1999) 1990-99 (%) 1990-99 (%) lions) Line I Guinea I 84.7 1 7.4 I 40 I 490 I 1.42 I Congo (Dem. Rep.) 80.0 51.4 100 -6 Zambia 74.8 10.1 86 320 -2.3 I Niger I 70.6 I 10.8 I 63 I 190 I -1.5 I I Botswana I 70.0 I 1.6 I .. I 3040 I 2.53 I Namibia 55.4 1.7 2100 1.6 Jamaica 51.3 2.6 19 2400 -0.13 Sierra Leone 50.0 5.0 68 130 -6.31 Suriname 48.3 0.4 1350 2.71 Chile 46.6 15.2 21 4600 4.86 Mauritania 46.0 2.7 57 390 0.55 Papua New Guinea 44.8 4.8 770 2.1 1 Peru 43.7 25.7 49 21 30 1.5 Mongolia 43.0 2.4 36 390 -1.64 Central Afr. Republic 42.1 3.6 290 -0.82 Ukraine 40.0 49.6 32 770 -8.63 Mali 40.0 10.8 240 0.69 Togo 37.7 4.7 32 310 -1.27 Bolivia 35.6 8.3 990 1.63 I Guyana I 35.0 I 0.9 I .. 1 760 I 4 I I Ghana I 34.0 I 19.2 I 31 I 400 I 1.55 I South Africa 30.0 42.8 3160 -0.67 Jordan 28.9 4.9 12 1630 0.4 I I I ~1 I I ~~ Kazakhstan 23.2 14.9 35 1290 -4.36 Kyrgyz Republic 21.2 4.9 51 300 -4.58 Morocco 20.0 28.7 19 1190 0.73 Armenia 20.0 3.8 490 -2.6 Uzbekistan 18.4 24.7 640 -2.46 Cuba 17.8 11.2 500 5.6 Tanzania 15.8 33.7 42 260 0.36 Sources: 'World Bank and International Finance Corporation (2002); World Development Indicators, Central Data- base, World Bank. World Development Indicators, World Development Report 2003; ".." : Not Available 63 Annex C Annex C : OED Evaluation Guidelines OED’s guidelines for evaluating the Outcome, Sustainability and Institutional Development Im- pact o f projects are summarized below: OUTCOME Definition: the extent to which theproject’s major relevant objectives were achieved, or are ex- pected to be achieved, eflciently. The outcome criterion i s assessed on a 6-point scale -- highly satisfactory, satisfactory, moder- ately satisfactory, moderately unsatisfactory, unsatisfactory, highly unsatisfactory. These differ- entiations reflect the large amount of information contained in the assessments o f the three crite- r i a supporting the outcome assessment (relevance, efficacy, and efficiency). The guiding principles provided below cover a high proportion o f likely project evaluation scenarios. Ratings Highly Satisfactory: Project achieved or exceeded, or is expected to achieve or exceed, all i t s major relevant objectives efficiently without major shortcomings. Satisfactory: Project achieved, or i s expected to achieve, most o f i t s major relevant objectives efficiently with only minor shortcomings. Moderately Satisfactory: Project achieved, or i s expected to achieve, most o f i t s major relevant objectives efficiently but with either significant shortcomings or modest overall relevance. Moderately Unsatisfactory: Project i s expected to achieve i t s major relevant objectives with major shortcomings or i s expected to achieve only some o f i t s major relevant objectives, yet achieve positive efficiency. Unsatisfactory: Project has failed to achieve, and i s not expected to achieve, most o f i t s major relevant objectives with only minor development benefits. Highly Unsatisfactory: Project has failed to achieve, and i s not expected to achieve, any o f i t s major relevant objectives with no worthwhile development benefits. I N S T I T U T I O N A L DEVELOPMENT IMPACT (IDI) Definition: the extent to which a project improves the ability o f a country or region to make more efficient, equitable and sustainable use o f its human, financial, and natural resources f institu- through: (a) better definition, stability, transparency, enforceability, andpredictability o tional arrangements and/or (b) better alignment o f the mission and capacity of an organization with its mandate, which derives from these institutional arrangements. IDI includes both in- tended and unintended effects o f a project. Development can be defined as a process o f institutional transformation through which scarce resources are used to enhance human welfare over the long term. This transformation involves changes in values, customs, laws and regulations, formal and informal rules as w e l l as periodic realignments o f organizational mandates, objectives, competencies and resources. A develop- ment intervention has a positive institutional development impact if it effects such a transforma- tion and thereby has enhanced the ability o f a country or region to make more efficient, equitable Annex C 64 and sustainable use o f the human, financial, and natural resources at i t s disposal. Accountability, good governance, the rule o f law and the participation o f the c i v i l society and the private sector are prominent characteristics o f an effective institutional environment. Ratings High: Project as a whole made, or i s expected to make, a critical contribution to the coun- try’shegion’s ability to effectively use human, financial, and natural resources, either through the achievement o f the project’s stated ID objectives or through unintended effects. Substantial: Project as a whole made, or i s expected to make, a significant contribution to the country’s/region’s ability to effectively use human, financial, and natural resources, either through the achievement o f the project’s stated ID objectives or through unintended effects. Modest: Project as a whole increased, or i s expected to increase, to a limited extent the coun- try’s/region’s ability to effectively use human, financial, and natural resources, either through the achievement o f the project’s stated I D objectives or through unintended effects. Negligible: Project as a whole made, or i s expected to make, little or no contribution to the coun- try’s/region’s ability to effectively use human, financial, and natural resources, either through the achievement o f the project’s stated ID objectives or through unintended effects. SUSTAINABILITY Definition: the resilience to risk of net benefitsflows over time Sustainability i s evaluated by assessing the risks and uncertainties faced by a project and by as- certaining whether adequate arrangements are in place to help avoid known operational risks or mitigate their impact. The rating helps to identify projects that require close attention by the bor- rower, the Bank and other partners in managing r i s k s that may affect the f l o w o f net benefits. Sustainability says nothing about the absolute level o f the net benefits in relation to economic justification thresholds. I t focuses o n the features that contribute to the maintenance o f opera- tional achievements over the long term and the adaptability o f operational designs and imple- mentation arrangements to deal with shocks and changing circumstances. Ratings Highly Likely: Project net benefits f l o w meets most o f the relevant factors determining overall resilience at the “high level”, with all others rated at the “substantial” level. Likely: Project net benefits flow meets all relevant factors determining overall resilience at the “substantial” level. Unlikely: Project net benefits flow meets some but not all relevant factors determining overall resilience at the “substantial” level. Highly Unlikely: Project net benefits f l o w meets few o f the relevant factors determining overall resilience at the “substantial” level. Not Evaluable: Insufficient information available to make a judgment. 65 Annex D Annex D: Background Papers THEMATICSTUDIES 1. World Bank. 2002. Evaluation o f The World Bank Group's Activities I n The Extractive Indus- tries: Review Of The Portfolio Of World Bank Extractive Industries Projects. OED Background Paper, World Bank. 2. Luis A. Ramirez, 2002. Review of the World Bank's Assistance on Revenue Management Issues in Resource Abundant Countries. OED Background Paper, World Bank. 3. Melissa A. Thomas, 2003. Factoring in Governance: The World Bank and Extractive In- dustry Projects. OED Background Paper, World Bank. 4. Roger J. Batstone, 2003. Review OfImplementation o f World Bank Extrac- f Safeguard Policies o tive Industries Projects. OED Background Paper, World Bank. CASE COUNTRY STUDIES 1. World Bank. 2003. World Bank Group 's Activities I n The Extractive Industries: Ecuador Country Case Study. OED Background Paper, World Bank. 2. World Bank. 2003. World Bank Group 's Activities I n The Extractive Industries: Equato- rial Guinea Country Case Study. OED Background Paper, World Bank. 3. World Bank. 2003. World Bank Group 's Activities I n The Extractive Industries: Ghana Country Case Study. OED Background Paper, World Bank. 4. World Bank. 2003. World Bank Group's Activities I n The Extractive Industries: Papua New Guinea Country Case Study. OED Background Paper, World Bank. 5. World Bank. 2003. World Bank Group 's Activities I n TheExtractive Industries: Kazakh- stan Country Case Study. OED Background Paper, World Bank. PERFORMANCE PROJECT REPORTS ASSESSMENT 1. World Bank. 2003. Project Performance Assessment Report: Brazil Gas Sector Devel- opment Project (L4265), Brazil Hydrocarbon Transport/Processing Project (L33 76), and Brazil Natural Gas Distribution Project - Suo Paul0 (L3043). Draft Report, Operations Evaluation Department, World Bank. 2. World Bank. 2003. Project Performance Assessment Report: Ecuador Mining Develop- ment and Environmental Control Technical Assistance Project (L36.55). Draft Report. Operations Evaluation Department, World Bank. 3. World Bank. 2003. Project Performance Assessment Report: Equatorial Guinea Second Petroleum Technical Assistance Project (Credit 2408). Report No. 24430. Operations Evaluation Department, World Bank. 4. World Bank. 2003. Project Performance Assessment Report: Ghana Mining Sector Re- habilitation Project (C1921) and (L3927). Draft Report. Operations Evaluation Depart- ment, World Bank. 5. World Bank. 2003. Project Performance Assessment Report: Kazakhstan Petroleum Technical Assistance Project (Loan3 744). Draft Report. Operations Evaluation Depart- ment, World Bank. Annex D 66 6. World Bank. 2003. Project Performance Assessment Report: Papua New Guinea Petro- leum Exploration TechnicalAssistance Project(Credit 1279) and Petroleum Exploration and Development Technical Assistance Project (Loan 3670). Report No. 24405. Opera- tions Evaluation Department. World Bank. 7 . World Bank. 2003. Project Performance Assessment Report: Ukraine Coal Pilot Project and Coal Sector Adjustment Loan (Credit 4016 & 4118). Report No. 24928. Operations Evaluation Department, World Bank. SURVEYREPORT OED. 2003. An Analysis o f the Stakeholder and World Bank Group StaffSurueys for the Extractive Industries Evaluation. OED Internal Draft, World Bank. 67 R e f e ren ces References Auty, R. 2000. “How Natural Resources Affect Economic Development.” Development Policy Review 18(4) :347-64. Davis, Graham A. and John E. Tilton. 2001. Should Developing Countries RenounceMining? A Perspec- tive On The Debate. Colorado School o f Mines. Davis, Jeffrey, Roland0 Ossowski, James Daniel, and Steven Barnett. 200 1. Stabilization and Savings Funds for Nonrenewable Resources: Experience and Fiscal Policy Implications. International Monetary Fund, Washington D.C. Energy Sector Management Assistance Program (ESMAP). 1997. Kazakhstan Natural Gas Investment Strategy Study. ESMAP Report No. 199. Friends o f the Earth. 200 1. “Phasing out International Financial Institution Financing For Fossil Fuel and Mining Projects, Demanding Local Community Self-determination.” Position Paper. Gelb, A. 1984. 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