[Senate Hearing 109-912]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-912
 
     MULTILATERAL DEVELOPMENT BANKS: DEVELOPMENT EFFECTIVENESS OF 
                        INFRASTRUCTURE PROJECTS

=======================================================================

                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                       ONE HUNDRED NINTH CONGRESS



                             SECOND SESSION



                               __________

                             JULY 12, 2006

                               __________



       Printed for the use of the Committee on Foreign Relations


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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)

  


                            C O N T E N T S

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                                                                   Page

Bapna, Manish, executive director, Bank Information Center, 
  Washington, DC.................................................    39
    Prepared statement...........................................    42
    Examples of Smart Infrastructure Projects Financed by MDBs...    66
    Annex 1.--Profiles of Large Infrastructure Projects Supported 
      by MDBs....................................................    67
Herrera Descalzi, Hon. Carlos, former Minister of Energy and 
  Mines, vice-dean, National Engineers Association of Peru, Lima, 
  Peru...........................................................    21
    Prepared statement...........................................    23
    Responses to questions submitted for the record..............    78
Horta, Dr. Korinna, senior economist, Environmental Defense, 
  Washington, DC.................................................    27
    Prepared statement...........................................    29
    Responses to questions submitted by Senator Richard G. Lugar.    81
Lowery, Hon. Clay, Assistant Secretary for International Affairs, 
  Department of the Treasury, Washington, DC.....................     3
    Prepared statement...........................................     4
    Responses to questions submitted by Senator Richard G. Lugar.    70
    Responses to questions submitted by Senator Paul Sarbanes....    74
Lugar, Hon. Richard G., opening statement........................     1
Quijandria, Hon. Jaime, executive director, the World Bank, 
  former Minister of Energy and Mines of Peru....................    16
    Prepared statement...........................................    19
    Responses to questions submitted by Senator Richard G. Lugar.    75

              Additional Material Submitted for the Record

Article from Ethics World........................................    82
Letter from the Ambassador of Peru to the United States, 
  submitted by Senator Richard G. Lugar..........................    64
USG IDB Board Statement: Peru--Proposal for a Loan for Camisea 
  Project September 10, 2003.....................................    86
World Bank--Chad Cameroon Pipeline and Capacity Building 
  Projects--United States Position--Board Date: June 6, 2000.....    87

                                 (iii)

  


     MULTILATERAL DEVELOPMENT BANKS: DEVELOPMENT EFFECTIVENESS OF 
                        INFRASTRUCTURE PROJECTS

                              ----------                              


                        WEDNESDAY, JULY 12, 2006

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Richard G. 
Lugar (chairman of the committee) presiding.
    Present: Senators Lugar and Martinez.

 OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM 
                            INDIANA

    The Chairman. This hearing of the Senate Foreign Relations 
Committee will come to order.
    The committee meets today to continue our review of United 
States policy toward the multilateral development banks, the 
MDBs. This is the sixth in a series of MDB hearings that began 
in 2004. Those earlier hearings contributed to the committee's 
understanding of both the value of the MDBs' work and the 
problems with their operations.
    These hearings also formed the basis of my MDB reform bill, 
S. 1129, which was approved unanimously by the committee. 
Significant portions of the bill became law in November 2005. 
The legislation contains many reforms aimed at achieving more 
transparency and accountability in the banks' operations.
    The need for oversight did not end with the passage of the 
MDB reform legislation. The United States has strong national 
security and humanitarian interests in alleviating poverty and 
promoting economic progress around the world. The U.S. 
Government must ensure that the MDB funds are spent well, both 
because of our responsibility to American taxpayers and because 
inefficiency and corruption undermine our basic humanitarian 
and our foreign policy objectives.
    The efforts of the Foreign Relations Committee, the 
Congress as a whole, and the Bush administration, have helped 
change the terms of debate regarding corruption and its 
corrosive influence on development. Not long ago, corruption 
was a taboo topic for international aid agencies and donors. 
This changed under the World Bank's previous president, James 
Wolfensohn. His successor, Paul Wolfowitz, has further raised 
the profile of anticorruption efforts by reorganizing the 
Bank's internal integrity unit and suspending several loans 
because of corruption concerns.
    Congress and the Bush administration have highlighted the 
importance of good governance to economic growth by creating 
the Millennium Challenge Corporation, which provides extra aid 
to countries with a strong legal framework to promote honest 
government and sound economic policies.
    Recently, the Foreign Relations Committee held a hearing to 
review another critical initiative, the U.N. Anticorruption 
Convention. We heard strong testimony in favor of ratification 
from the Justice Department, the State Department, the National 
Foreign Trade Council, and Transparency International. When 
ratified by the Congress, this treaty will bolster our efforts 
to fight corruption around the world and help level the playing 
field for U.S. businesses.
    The MDBs themselves are also responding positively. Earlier 
this year they formed a joint anticorruption working group to 
coordinate policies and to share information. In March, the 
Inter-American Development Bank published a strengthened Code 
of Ethics. Later this summer the European Bank for 
Reconstruction and Development is expected to issue its first 
ever anticorruption report.
    Fighting corruption is only one aspect of the broader 
challenge of ensuring that large development infrastructure 
projects are effective. Critics charge that these projects make 
few contributions to economic development and poverty 
alleviation. This is a timely issue because the World Bank and 
other MDBs have announced plans to increase their 
infrastructure lending.
    Today the committee will focus its oversight effort on two 
important case studies. The Camisea pipeline project in Peru 
brings natural gas and gas liquids to the Pacific coast from 
fields owned by indigenous people in the interior. Financed 
with the help of the Inter-American Development Bank, the 
project began operating in 2004. Five spills have occurred in 
the natural gas liquids pipeline, and some NGOs have complained 
that local people have not seen the benefits from the gas 
royalties, a portion of which are earmarked for Peru's 
military.
    In Chad, the World Bank set up a model revenue management 
program to ensure that money generated by the Chad-Cameroon oil 
pipeline would be spent for the good of the people, but earlier 
this year, soon after the pipeline began operating, the 
Government of Chad unilaterally reneged on its commitment to 
work under these anticorruption procedures. The government also 
withdrew its pledge to direct the bulk of the revenue to 
health, education, and rural development. The World Bank had 
little choice but to suspend lending to Chad.
    To help us examine these issues, we are joined by two 
distinguished panels. First, we will hear from Mr. Clay Lowery, 
Assistant Secretary of the Treasury for International Affairs. 
He will review the U.S. Government's efforts to ensure that MDB 
projects contribute to the goals of poverty reduction and 
development.
    On the second panel, we will hear from four experts on MDB 
infrastructure projects. Mr. Jaime Quijandria is an executive 
director at the World Bank; Mr. Carlos Herrera Descalzi is 
vice-dean of the National Engineers Association of Peru; Dr. 
Korinna Horta is a senior economist for the nonprofit 
organization, Environmental Defense; and Mr. Manish Bapna is 
executive director of the Bank Information Center.
    We welcome all of our witnesses and look forward to our 
discussion with them following their testimony. It's a 
privilege now to call upon you, Secretary Lowery, as our 
initial witness for your testimony. At the time that Senator 
Biden, our distinguished ranking member, arrives, I will call 
upon him for his opening statement.
    Mr. Lowery.

    STATEMENT OF HON. CLAY LOWERY, ASSISTANT SECRETARY FOR 
INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY, WASHINGTON, 
                               DC

    Mr. Lowery. Thank you, sir. Chairman Lugar, I'm pleased to 
have the opportunity to discuss the importance of 
infrastructure to achieving our shared goal of promoting 
economic growth and reducing poverty in developing countries.
    It was just over 50 years ago that President Dwight 
Eisenhower signed into law the Federal Aid Highway Act that 
created today's interstate highway system. Few pieces of 
legislation have had a more profound and positive effect on our 
daily lives. It helped spur economic growth, create new jobs, 
and renew prosperity.
    I mention this example to remind us how essential an 
ingredient infrastructure is for economic productivity, for the 
delivery of social services, and for regional integration. The 
countries where the multilateral development banks work, 
unfortunately, are often lacking this ingredient.
    For example, in Cambodia, just 15 percent of the people 
have access to electricity. In Albania, only 31 percent of the 
rural population lives within 2 kilometers of an all-season 
road. In Africa, barely a third of the population has access to 
improved sanitation, and hundreds of millions of poor people 
still lack access to affordable clean water. The result is 
widespread poverty, reduced opportunities for economic growth, 
rampant disease, and even death.
    The multilateral development banks can play a critical role 
in helping developing countries meet their infrastructure 
needs. The MDBs engage broadly in this area, providing direct 
funding, creating the enabling environment to stimulate private 
investment flows, supporting innovative approaches such as 
performance-based contracting, putting in place safeguards to 
address and mitigate adverse social and environmental impacts, 
and taking steps to reduce corruption.
    You mentioned, Mr. Chairman, the cases of Camisea and the 
Chad-Cameroon pipeline. These are important infrastructure 
projects for the institutions and for the countries that are 
involved. Instead of focusing attention solely on these cases, 
however, which were quite controversial and where there are 
many problems that need to be addressed, I think it is 
important to remind ourselves that there are infrastructure 
development projects that are having an impact on poverty, on 
helping countries emerge from conflict, and on assisting areas 
that are vital to U.S. national interests.
    For example, in 1998 the World Bank created a small 
infrastructure project accompanied by technical assistance to 
local communities that has helped Madagascar increase its 
delivery of safe water to 220,000 more people. In Afghanistan, 
financing by the Asian Development Bank has helped establish a 
much more reliable telecommunications system.
    And today there is a ceremony taking place in Turkey, 
celebrating the opening of the BTC pipeline. While the EBRD and 
the IFC played important roles in financing this pipeline, 
maybe an even more important role was their work in ensuring 
that affected communities along the right-of-way were consulted 
in determining areas for the pipeline to avoid, compensation 
for losses, and local economic development priorities.
    I will not sit here and tell you that everything has gone 
well in the infrastructure sector. I am well aware that many 
infrastructure projects that are funded by the MDBs, as well as 
by other sources, have been affected by mismanagement, cost 
overruns, and outright corruption. The institutions themselves 
are thinking through the lessons learned, and let me tell you 
today where the administration is focusing its attention.
    First, we conduct regular scrutiny and oversight of MDB 
projects and policies, including, where we can afford it, 
conducting site-specific scrutiny.
    Second, we strive to set the highest standards across the 
MDBs in terms of fiduciary control, procurement practices, and 
environmental and social safeguards.
    Third, we must continue to raise the bar on securing 
results-oriented approaches that build in monitorable, 
quantifiable targets and benchmarks to measure and track 
results in MDB-financed projects.
    Fourth, we will continue to push that the MDBs work with 
the countries on establishing dialogs with stakeholders that go 
beyond the local elites and government to include the poor.
    And, finally, the MDBs will need to do a better job in 
engaging private capital and promoting the market's role in 
delivering services. To catalyze increased volumes of private 
capital, the MDBs need to focus countries on improving 
investment climates, including contract enforcement and 
regulatory regimes; develop efficient, prudent mechanisms for 
sharing risk; and help countries build capacity to identify the 
most productive projects and implement them in a sustainable 
way.
    Mr. Chairman, I applaud this committee, and you in 
particular, for its careful attention to these important 
issues, and I look forward to any questions that you may have. 
Thank you.
    [The prepared statement of Mr. Lowery follows:]

    Prepared Statement of Hon. Clay Lowery, Assistant Secretary for 
   International Affairs, Department of the Treasury, Washington, DC

    Chairman Lugar, ranking member Biden, members of the committee, I 
am pleased to have the opportunity to discuss the importance of 
infrastructure to achieving our shared goal of promoting economic 
development and reducing poverty. The multilateral development banks 
(MDBs) have an important role to play in helping developing countries 
meet this vital need. Theirs is a broad engagement that encompasses 
direct funding to catalyze other financial flows; creating the enabling 
environment to stimulate private investment flows, both domestic and 
foreign; supporting innovative approaches that can be scaled up, if 
successful; putting in place safeguards to address and mitigate adverse 
social and environmental impacts; and taking steps to reduce 
corruption.

                      IMPORTANCE OF INFRASTRUCTURE

    Infrastructure is essential to economic growth and productivity--it 
is the fundamental investment backbone for the private sector, 
essential for delivery of social services, improves regional 
integration, and is a fundamental jump-start for countries coming out 
of conflict. As many studies have shown, the economic returns to 
infrastructure are high. The returns depend on the region and the 
quality of the infrastructure, but research by the World Bank suggests, 
for example, that a 10 percent increase in Latin America's 
infrastructure assets could result in an extra 1.5 percentage points of 
growth per year. Another World Bank model indicates that if the growth 
of investment in Africa's infrastructure had equaled that of East Asia 
during the 1980s and 1990s, the average African would be roughly 30 
percent wealthier today. This is a conservative estimate as one 
specific small scale example demonstrates--an ADB study showed how the 
establishment of a new road in a Vietnamese village raised the per 
capita income of the local households by 30 percent between 1993 and 
1998.
    Infrastructure--whether related to transportation, water supply and 
sanitation, energy, or communication--is a vital input into private 
sector development, including small and medium enterprises. This is not 
unique to the developing world; the dynamism of the U.S. economy is due 
in large measure to the foresight of investments in such infrastructure 
basics as the interstate highway system--which is now celebrating its 
50th anniversary--and efficient local and regional electric power 
grids. We often take these for granted, but they are not taken for 
granted by the poor in countries where clean water and reliable energy 
are luxuries, if they exist at all.
    Infrastructure also is essential to the delivery of social services 
and human capital development, such as by providing power to health 
care clinics or to light and heat rural classrooms. Improving access to 
clean water and sanitation services also affects economic growth and 
poverty reduction directly by improving health and labor productivity 
through reductions in water-borne diseases and reducing the amount of 
time people spend fetching water. According to the World Health 
Organization, each year roughly 1.7 million lives are lost to unsafe 
water and inadequate sanitation.
    Infrastructure can play an important role in promoting regional 
integration and entry into the global economy, which is a particularly 
important development challenge in countries with small labor markets 
and limited natural resources. Singapore is one example of an economy 
that has flourished because it put in place the infrastructure needed 
to become an international trading center, which helped it graduate, 
long ago, from official development assistance.
    Countries emerging from conflict or natural disasters need fast 
responses to rebuild infrastructure facilities as a starting point for 
reconstruction of the economy and restoration of basic services. The 
current government of Afghanistan, for example, recognized that civil 
war and a legacy of neglect had left the country facing a serious 
infrastructure shortfall. The MDBs have helped the government to 
prioritize, design, finance, and implement projects and regulatory 
systems to overcome this legacy. Despite the substantial challenges, we 
are already seeing results. Financing from the Asian Development Bank 
(AsDB) for a private sector cellular phone provider, for example, has 
led to rapid distribution of telecommunications services that are so 
reliable that even the United States officials based in Afghanistan use 
them. Reconstruction of the country's highway network is proceeding 
steadily, with the AsDB completing a vital road between Kandahar and 
Spin Boldak, at the Pakistani border, and the World Bank completing 
roads that are helping to connect Kabul to Tajikistan. Moreover, travel 
time to go end-to-end on the Kabul-to-Kandahar Highway, which was also 
financed by USAID, has fallen significantly from 16 hours down to 5 or 
6 due to recent improvements in road conditions. These roads help get 
goods to market and provide the basic infrastructure that will allow 
Afghanistan to achieve its vision of becoming a land bridge connecting 
Central and South Asia.

                          INFRASTRUCTURE NEEDS

    Infrastructure needs in both low-income and emerging market 
economies are vast. While calculations vary, even the lower-end 
estimates by the World Bank suggest that developing countries need to 
devote around 5.5 percent of GDP to infrastructure investment, which is 
well above the average level of investment in the sector, currently 
around 3.5 percent of GDP. The under-investment reflects not only 
declining official assistance flows (recently reversed by most of the 
MDBs), but more importantly investment climates considered inhospitable 
by many private sector investors.
    The United States has encouraged increased attention to 
infrastructure by the multilateral development banks (MDBs) recognizing 
that developing countries' needs were not being met and that investment 
flows from the private sector were declining, particularly in the wake 
of the Asian financial crisis. In 2003, the World Bank adopted an 
Infrastructure Action Plan that has scaled up infrastructure 
investments, expanded the range of instruments and funding sources, and 
catalyzed private resources. Other MDBs, with United States' urging, 
are creating special funding facilities, such as the Infrastructure 
Facility of the Americas at the Inter-American Development Bank and the 
Infrastructure Consortium for Africa established at the African 
Development Bank. The Asian Development Bank has expanded its 
infrastructure lending in the last few years, primarily in energy, 
water supply and management, rural transport, and telecommunications. 
The EBRD has important initiatives in power and energy, municipal and 
environmental infrastructure, transport, and telecoms.
    In addition to providing direct financing (loans, grants, equity, 
and guarantees to mitigate risk), the MDBs support infrastructure 
development by strengthening the policy and regulatory framework, 
giving analytical and diagnostic support--such as investment climate 
assessments and country infrastructure studies--and building 
institutional capacity to manage infrastructure investments. It is also 
critical that the MDBs do more--directly and indirectly--to attract 
both foreign and domestic private-sector investment in critical 
infrastructure.

             SUCCESSFUL PROJECTS AND INNOVATIVE APPROACHES

    Much is known about the controversial projects which the MDBs have 
helped finance and which have commanded a great deal of U.S. officials' 
time and resources. However, to focus exclusively on these operations 
is to overlook a substantially greater portion of projects that are 
likewise having a positive impact on economic activity and social well-
being. Let me use this opportunity to highlight examples where MDBs 
have supported innovative infrastructure proposals and projects that 
meet pressing public needs.

   The AfDB is helping the countries of Senegal and Mali to 
        complete the missing road links between Bamako and Dakar, and 
        thereby reduce transport costs and promote further economic 
        integration between the two countries and their neighbors. The 
        project aims, by 2010, to reduce the amount of time for goods 
        removal at the Dakar port from 7 to 2 days; to reduce the 
        border crossing time from 1 day to 2 hours; and to reduce the 
        distance to fetch water from 5 km to less than 1 km. The 
        project will also be partially financed by private transport 
        sector operators in Senegal and Mali.
   The World Bank has helped to complete a network of water and 
        sanitation services in Ahmedabad, India, that has increased the 
        daily profits from vegetable farming by women living and 
        working in local slums, and has sharply reduced the incidence 
        of disease. A World Bank water supply and sanitation project in 
        Uttar Pradesh empowers local communities to make design choices 
        and procure goods and services.
   The IFC has made a number of investments in locally owned 
        firms, such as Celtel, a cellular telephone company operating 
        in Africa that subsequently witnessed remarkable success. 
        Within 7 years of starting up operations, Celtel grew to 
        operating in 14 countries and serving around 9 million 
        subscribers.
   In the Kyrgyz Republic, the EBRD is working with a state-
        owned joint-stock power company to improve the efficiency and 
        reliability of electric power transmission and distribution in 
        the Talas region, as well as to support private involvement in 
        power and improve collection and reduce commercial losses. It 
        is an important step toward private management of power 
        distribution for the first time in the Central Asian region.

    This is just a sampling; there are many other infrastructure 
projects that I could cite.

                             THE WAY FORWARD

    I will not sit here and tell you that everything has gone well in 
this sector. I am well aware that many infrastructure projects--those 
funded by the MDBs as well as by other sources--have been affected by 
mismanagement, cost overruns, and outright corruption. The World Bank 
recently produced a lessons learned paper in which it identified a 
number of common issues that prevented it from achieving better results 
on its infrastructure engagements. The main culprits included 
inappropriate project design, delays in addressing access for the poor, 
insufficient management of expectations of private sector 
participation, late recognition of the importance of environmental and 
social sustainability, a lag in addressing corruption issues, and 
weaknesses in communications with stakeholders. When these things 
happen, infrastructure investments become enduring reminders of these 
inefficiencies, and send a negative signal to both donors and the 
private sector. These are important lessons and as the largest 
shareholder in the MDBs, we will continue to work to see that these 
lessons are reflected in the bank's operations going forward.
    First, we will work to enhance the application of proper 
safeguards, to offset or reverse the problems through regular scrutiny 
and oversight of MDB projects and policies--including, where we can 
afford it, to conduct site specific scrutiny.
    Second, we strive to set the highest standards across the MDBs, in 
terms of fiduciary controls, procurement practices, and environmental 
and social safeguards. As I said in my remarks on anticorruption to 
this committee in March of this year, Treasury is advancing a 
comprehensive reform agenda at the MDBs to attack corruption around the 
world and to root out corruption within the MDBs. Particularly germane 
to the infrastructure sector is sound revenue management. Through our 
interventions, we have secured key policy and project-related reforms, 
such as the transparent accounting and reporting of project-related 
revenue flows to make sure that these projects are accountable. For 
example, following strong U.S. leadership, the International 
Development Association (IDA) agreed to require that financial 
assistance for any project with a significant impact on revenues should 
be predicated upon the government having in place a functioning system 
for accounting for revenues and expenditures. We will continue to work 
to ensure that public disclosure by MDBs is the norm.
    Third, we must continue to raise the bar on securing results-
oriented approaches that build in monitorable targets and benchmarks to 
measure and track results in MDB-financed projects. We have seen 
progress in this regard: Now all of the MDBs are producing results 
measurement frameworks for their on-the-ground investments. We will 
closely monitor a new pilot project by the World Bank to strengthen the 
risk profile of infrastructure projects during the design phase and 
develop benchmarks and indicators that will trigger needed remedial 
action during project implementation.
    Fourth, one of the lessons from experience is that access for the 
poor raises a distinct set of issues for project preparation and 
implementation. This requires dialog with shareholders that goes beyond 
the local elites and government to include the poor. Access for the 
poor also requires new approaches for structuring projects. One 
potential approach that is being used is output-based aid. This model 
uses targeted subsidies for reducing service costs for the poor while 
allowing private infrastructure providers to pursue cost recovery. In 
Cambodia, for example, private service providers were selected on a 
competitive basis to roll out water and sanitation services to 
villages. To make sure that this did not exclude the poorest 
inhabitants, who otherwise might not have enough money to pay the up-
front costs of getting hooked up to the system, an incentive payment 
was provided directly to the service provider for each eligible poor 
family that was connected to the network.
    Finally, but no less importantly, the MDBs will need to do a better 
job in engaging private capital and promoting the market's role in 
delivering services. Because official development assistance provides 
only around 5 to 10 percent of current spending on infrastructure, the 
MDBs' engagement will need to demonstrate both selectivity and 
``additionality.'' By ``additionality,'' I mean that the MDBs have to 
bring something to the table that the host country or private sources 
cannot or will not. And where the banks do engage, they should 
demonstrate that they are picking high-impact projects. Until 1997, 
there was a steadily increasing appetite by the private sector for 
investing in developing country infrastructure sectors. The Asian 
financial crisis and several high-profile project failures have cut 
those private flows in half, but this trend can be reversed with the 
right policy and regulatory framework and with assistance to help 
countries develop bankable projects.
    Given the vast infrastructure needs and the shortage of public and 
official finance, the international financial institutions need to find 
effective ways of unlocking private investment flows by addressing 
specific market failures. We firmly believe that innovative proposals 
can employ small amounts of official finance to catalyze orders of 
magnitude more in private investment. That's the kind of leveraging of 
public money we like to see. As one example, we know that private 
investors often have a hard time obtaining information on which 
infrastructure proposals make economic sense and which are largely 
driven by polities. We have developed an innovative initiative in the 
IDB; targeting official money to reduce investors' search costs for 
good projects that gets at precisely this problem.
    If the MDBs are to catalyze increased volumes of private capital, 
they will need to (1) address the regulatory regime obstacles so that 
investors have a degree of certainty and a clear path for cost-
recovery; (2) promote realistic expectations about the benefits of 
private capital; and (3) seek new mechanisms such as output-based aid 
and public-private partnerships that address the sustainability of 
private infrastructure services. We are committed to working with the 
banks to help countries put in place this framework.
    In closing, I welcome your interest in this very important aspect 
of the work of the multilateral development banks and I look forward to 
your questions.

    The Chairman. Thank you very much, Secretary Lowery.
    Let me just begin with a general overview question. 
Infrastructure can be an important investment to reduce poverty 
in developing countries, particularly infrastructure that 
allows people
access to energy, water, communications, and 
transportation. However, the committee has become aware of 
investments in infrastructure that unfortunately diverted 
resources from the needy and caused negative impacts on the 
poor. The revenues apparently were not put to the best use.
    Now, as the MDBs are supported by taxpayer dollars from 
donor countries, their projects are expected to reduce poverty 
and improve growth in the developing world. In your judgment, 
are the MDB banks carefully evaluating infrastructure projects 
based on their development impact from the beginning of 
consideration, as well as through the working out of the 
projects?
    Mr. Lowery. My belief is that the MDBs, to a large extent, 
do exactly what you just asked if they did. They try very hard 
to figure out how these infrastructure projects are going to 
actually help the people of these countries.
    There are times when we have concerns that the MDBs might 
be moving in a way that is too fast, or the incentives are 
wrong. The incentives sometimes can be to actually ``let's get 
a project on or a program financed,'' as opposed to ``let's see 
what results we're actually going to achieve with those 
programs.''
    We have tried to focus our attention on--our voice and 
arguments have basically been toward making project selection 
much more targeted and selective based on performance in terms 
of policies. We've tried to make sure that the MDBs are 
striving to have the best environmental, social safeguards, as 
well as procurement and fiduciary standards. And, finally, we 
have tried to really focus on measuring the results of these 
things.
    That said, there are going to be mistakes made. This is a 
very, very risky business, and we just need to correct those 
mistakes when they happen.
    The Chairman. In your continuing analysis of these 
projects, have you developed metrics that offer you some basis 
of comparing results? In other words, these are always clearly 
value judgments, but after you have been through a good number 
of them, there may be some characteristics that lead you to 
have some standards.
    Mr. Lowery. I think that it's a good question. The metrics 
that we try to look at are--first of all we try to look at the 
broad, macro picture in terms of macroeconomics but also 
microeconomics. What are the countries doing to actually try to 
reduce problems in their policy environment? That's the first 
metric we look at, and there are a number of indicators that go 
with that.
    Second, I think, is to try to look at more specifics in 
terms of the actual projects themselves. Are the results' 
frameworks being put in at the front that are monitorable and 
quantifiable, or are they basically kind of things like, 
``Well, we seek to do something,'' which is kind of amorphous 
and you're not really sure what they're trying to do. So that's 
something that we focus very hard on.
    In fact, just the other day there was a loan in the Inter-
American Development Bank which was a loan for very good 
purposes, and it was going to help a country that's important 
to the United States. And we were very concerned that the 
measuring results agenda wasn't there, that we weren't sure 
what was going to actually be achieved.
    And actually, to the IDB management's credit and their 
staff's credit, they actually went back and tried to find us 
more metrics about how they were going to--it was a competitive 
loan, so how were they going to reduce the days in terms of red 
tape and bureaucracy that was involved, so that basically we 
could actually find out whether or not we're actually achieving 
something with this loan, or is it just money into a budget?
    The Chairman. I like your expression of these metrics up 
front to begin with, that you look for some indication there, 
as opposed to an editorial after it's all over. Some good 
things happened, but not necessarily either anticipated or 
planned.
    Mr. Lowery. Right.
    The Chairman. Now, a number of the infrastructure projects 
focused on energy generate revenue for the developing country, 
rather than improving the overall infrastructure of the 
country. Now, if the infrastructure project's main development 
impact is revenue generation, what can be done to ensure that 
those revenues are used for development?
    Mr. Lowery. I think that there's a variety of different 
things that the MDBs try to do. The first is probably just a 
broader perspective of the MDBs, actually, and the IMF on this 
one, work to help increase the transparency of the budget so 
that we actually have a better understanding of where the money 
is going, and more importantly that the people of the country 
have a better understanding of where the budget is going.
    And second is, the MDBs work on capacity-building within 
the governments themselves, so that they have the capacity to 
handle these resources in a more effective way and that they 
can put in controls.
    And third, in some projects, and this is more case-by-case, 
we look and see if there are mechanisms that can be set up, 
such as the Chad-Cameroon pipeline, which has had some 
problems, but one thing that has been set up was an oversight 
committee called a college. The college actually is made up of 
NGOs. The chairman of the college is actually the opposition 
leader. And Treasury actually has provided technical assistance 
to the college on budget transparency.
    The college is basically looking at the revenues that are 
flowing toward a certain portion of the Chad-Cameroon pipeline, 
to see if they're going toward health projects, education 
projects, and basic infrastructure. And the college has 
actually said at times things are working, but at times there 
have been problems. But in the past, there's a good chance we 
would not have known that, but now we do because of this 
mechanism that was set up. So it's kind of we try to do it on a 
variety of different levels.
    The Chairman. Well, the transparency idea that you have 
expressed, I think, is tremendously important. I was in Baku 
last
August, at the beginning of the bubbling of oil through the 
Baku-Ceyhan pipeline, and had a visit with President Aliyev of 
the country. He pledged to be very transparent from the 
beginning about the revenues coming to his country, so we 
welcome that. I hope to return this year and take another look, 
and President Aliyev, in fairness, has come to our country, and 
had a visit here within the last 2 months.
    But this is a very important issue, and this is not a 
project of the MDBs. This is by and large investment by British 
Petroleum and a large consortium, including some oil firms from 
our country. But at the same time, the principle is the same, 
in terms of what is going to occur in that country with regard 
to schools and houses and roads and so forth.
    Mr. Lowery. I agree with you completely, and as I 
mentioned, the IFC and the EBRD actually were helping on the 
financing of that project. In terms of President Aliyev's 
commitment, I know that our State Department has been working 
very closely with them on kind of a transparency initiative 
because of energy, to basically capture what's actually 
happening with energy revenues and what's happening on the 
other side of the equation, energy expenditures--or not energy 
expenditures, budget expenditures.
    The Chairman. Well, I look forward to working with you and 
State Department officials prior to our visit this time, so we 
all are on the same page asking questions, because this is an 
important policy for us.
    Let me note that, as you mention in your statement, the 
January 30, 2006 World Bank publication entitled ``Scaling Up 
Infrastructure: Building on Strength, Learning From Mistakes'' 
identified a number of lessons learned. Now, how are these 
lessons being integrated proactively in World Bank projects, in 
your judgment? And how are those lessons being integrated into 
the infrastructure projects, particularly finance, by other 
multilateral development banks?
    Mr. Lowery. I think that the World Bank has looked 
through--I mean, they just came out with a paper in February, 
but I think that some of the lessons they have been learning, 
the way they have explained it to me at least is, in the past 
when they were looking at corruption issues and infrastructure, 
they were looking at them from the big, overall, macro 
perspective, and sometimes from a project level.
    But they have said that what they have to look at more is 
how do you look at it in a sector, a particular sector, whether 
it's energy or transportation or telecommunication? So they are 
actually trying--that's one of the things that they right now 
are saying admittedly that they have to work on. So we are 
looking forward to seeing more from them there.
    They are also trying to figure out how to work much more up 
front the environmental and social issues into the project 
design of the program. And one of the problems that sometimes 
happens is, the project design has happened and it has happened 
from a much more technical perspective, and because of that we 
get to a situation later down the road where nobody had thought 
through the environmental issues, or they had thought through 
them but kind of after the fact.
    And I think that the World Bank is trying to move that much 
more up front, and they're doing it through their own 
management structural changes without trying to harm, I think, 
like overall compliance, as to whether or not they're following 
their policies and things like that.
    So I think that those are a couple of things that they have 
told us that they're working on, but the proof will be in the 
pudding, as usual.
    The Chairman. Looking ahead to the work of our second 
panel, what does the administration expect the IDB to do once 
the results have been received from the social and 
environmental audit of the first phase of the Camisea project? 
How can the IDB ensure that the audits lead to lessons 
implemented and not simply lessons observed?
    Mr. Lowery. Well, I think that there have been some lessons 
learned that need to be thought about very carefully on the 
Camisea project. When we looked at Camisea back in 2002-03, we 
were very concerned--we, the administration, were very 
concerned that the IDB was coming into this very late in the 
game. And the problem with that is--there is probably a 
threefold problem.
    First, the IDB's role is to catalyze private sector 
investment. It is not to fill a financing gap because the 
private sector investors ran out of money. So we're concerned 
about that.
    Second, because it was late in the game, they were not as 
involved in some of the project design work, and so they didn't 
have some of the environmental and social safeguards that 
probably they would have had in some of the other IDB projects.
    And third is that it's important to work on building 
capacity within the countries, in their municipalities and 
their communities, and I think that the IDB does a pretty good 
job on that but they've got to get started early because that's 
a very difficult issue to tackle.
    So we think that those are some lessons learned. I mean, in 
fact it's the reasons why we were the only country that 
actually did not support the Camisea project back in 2003, and 
we were alone, and obviously there have been some problems 
since then.
    But I think that in terms of going forward, first of all, 
we know that Camisea is a very important project to Peru. It's 
helping the country reduce energy costs, providing jobs, and it 
could be very important for Peru's economy.
    We think that the IDB, working with the Peruvian Government 
and the communities, needs to work to solve the problems that 
have been cropping up with Camisea I, and then with Camisea II 
they need to take into account the lessons that they have 
learned. And I think they're trying to do that by basically 
working right now with the Peruvians, which is much earlier in 
the process than was the case in Camisea I.
    As to how the United States will vote or look at that, we 
haven't actually made a decision. I mean, what we have to weigh 
is a variety of factors. We have to weigh the development 
benefits that could accrue to Peru and the Peruvian citizenry. 
We have to look at overall policies that we have toward the 
Inter-American Development Bank. We have to look at the 
environmental and social safeguards, as well as the fiduciary 
controls and some of the revenue management issues you had 
mentioned earlier. And we'll weigh those factors, as we did 
back in 2003, and then we'll figure out what to do.
    I know that the IDB is looking very carefully. President 
Moreno has been deeply involved. I think he was just in Peru, 
talking to them about this issue. And I know that President 
Toledo and President Garcia have talked about setting up some 
sort of oversight committee on this, so the Peruvian Government 
is also aware that this has been a problem and they've got to 
fix it.
    The Chairman. I thank you for that response. Let me just 
say that I will add into the record of the hearing a letter 
that I received from the Ambassador of Peru to the United 
States, in which he strongly endorses the results of what has 
been occurring, complete with an annex of benefits of the 
project, so that that will be a part of the record and his 
testimony in that form. [This information appears in the 
Additional Materials Submitted for the Record section.]
    Let me ask, does the experience of the Inter-American 
Development Bank with the Camisea project show that the 
organization has the capacity to monitor compliance with its 
own policies? And what is the United States recommending 
regarding this question, with regard to the pending 
reorganization of the IDB proposed by President Moreno? Given 
the experience of the Camisea project, what concern does the 
administration have regarding IDB's intent to increase private 
sector and infrastructure financing?
    Mr. Lowery. I think that the IDB does have fairly 
significant resources in terms of environmental and social 
compliance issues. I think that where they probably made some 
mistakes in Camisea, I was underestimating how much it would 
actually take because of how big this project really was, and 
how big a role they were having to play with the Peruvian 
Government and with the communities. I would think that the IDB 
has learned some lessons from that, and will work with them on 
those issues, both resource and policy issues.
    The role of the private sector is actually vital. I mean, 
in the end, what we want to see happen is these MDBs put 
themselves out of business, and the only way you're going to do 
that is to basically create the right types of environment to 
actually get private sector flows and investment capital 
coming.
    And I think that that was the hope in the 1990s, and you 
saw a dip in how much was going toward infrastructure from the 
MDBs, and a lot of that--I mean, there were a variety of 
reasons for that, but one of the reasons I think was they 
thought that private sector capital was going to start flowing 
better, and basically that didn't happen, and so they had to 
ramp up their ability to put in more.
    But I think it's very important that the IDB work with the 
private sector and do a better job. I mean, this is probably 
our number one priority at the IDB. We have talked very 
extensively with President Moreno and with his top staff on the 
United States really wants to see the IDB moving more toward 
how do you influence the environment so that the private sector 
can play a much more extensive role, whether it's in 
infrastructure projects or small and medium enterprise 
development.
    The Chairman. On the second item, why did the World Bank 
suspend new loans and grants to Chad in January 2006? Why did 
it resume lending to Chad in April 2006? What criteria does the 
World Bank use to decide when to cease funding to a country, 
and what action, if any, is our administration pushing the 
World Bank to take with regard to the revenues generated from 
the Chad-Cameroon pipeline?
    Mr. Lowery. The Government of Chad and the World Bank were 
having an argument back in 2005. The Government of Chad 
believed that it needed to use more of the resources that were 
coming from the revenues for the here and now, as opposed to 
for the future. There was a portion of the revenues, 10 
percent, that was going to something called the Fund for the 
Future, basically a rainy day fund, when the oil runs out.
    And I think that what the Chadian Government was saying is, 
``Look, we're really poor and we need the money now.'' That's 
kind of the good way of looking at it. There might have been 
problematic ways of looking at it as well. I think the World 
Bank was saying, ``Well, we had a deal and we need to kind of 
work on that deal.'' And I think frankly communications broke 
down between the two.
    And then in December--I believe it was December, maybe it 
was November--the Chadian Government, the parliament basically 
said, ``We're just going to overturn this deal.'' And so at 
that point in time the World Bank was basically stuck with a 
gun to its head, in a metaphorical sense, and basically you 
can't negotiate that way. So they basically said, ``Fine, we're 
going to stop the funds at the escrow account. We're going to 
cut off new lending, and we're going to stop disbursements on 
our pipeline.''
    Since that time, Chad and the World Bank have conducted a 
series of negotiations, both here--well, actually here, in 
Chad, and in France--to try to work out these agreements. And 
in April they created an interim agreement in which there would 
be traunched money coming out of the escrow account, but the 
percentages would change around a bit, but there would still be 
oversight of the college.
    We have basically been supportive of where the World Bank 
has been, but we've obviously listened very carefully to what 
Chad has been saying, because we wanted to get their 
perspective on this thing. They are trying to work out a more 
permanent solution in which, my guess is, there will be some 
renegotiation of how these funds will flow.
    And also the World Bank is trying to look at what has 
become a different issue which actually wasn't foreseen back in 
1999-2000, which was the tax revenues that would actually come 
in from this account, because at the time oil was $15 a barrel. 
It's now $75 a barrel. There's a lot more coming in, and I 
think that the World Bank is trying to figure out what to do 
with that, because that's obviously going to go into the 
Chadian Government's coffers. And the idea is again, budget 
transparency, capacity so that we and the people of Chad 
actually have an understanding of what's going on with this 
money.
    So that's kind of how we've been looking at it. We've tried 
to help, in basically working with the World Bank and working 
with Chad, and we've tried to help in a different way, which is 
providing technical assistance to this civil society group, 
that college that oversees kind of some of the funding.
    The Chairman. On that issue of the civil society groups, 
their claim is that several years ago they warned about 
problems with World Bank plans for the pipeline, and they claim 
that their warnings were ignored. In the workings of the World 
Bank, or, for that matter, the other development banks, to what 
extent is attention paid to civil society groups as opposed to 
governmental officials?
    Mr. Lowery. Well, I think that the World Bank obviously is 
more used to working with governments. I mean, that's what they 
do, so they will pay a lot more--they pay attention to 
governments, but they clearly do listen to civil society groups 
and to communities as to what is going to be effective.
    And I think if we look back at Chad-Cameroon, the World 
Bank's role from a financial perspective is tiny. It's not much 
of the overall financial structure. But their role in terms of 
setting up some of these groups, about where the money is 
going, the environmental safeguards, the World Bank played a 
crucial role in that, and that included working with civil 
society.
    I'm sure that there are some civil society groups that are 
disappointed in what happened, but the reason we know about 
what's going on with some of the money in Chad is not because 
of the United States people. It's not because of people in 
Europe. It's because of people in Chad, and that's because of 
civil society groups that are working in this college. I mean, 
the World Bank deserves some credit for helping set that type 
of system up.
    The Chairman. We thank you.
    Senator Martinez, do you have questions for our witness?
    Senator Martinez. Mr. Chairman, thank you very much. I know 
that you've covered extensively the Camisea project, which was 
one that interested me. And I won't go over that again except 
to ask the role, Mr. Lowery, that the--back on the issue of 
NGOs or civil society, as you were just discussing--have they 
in this particular instance been involved? What role have they 
played? And have they been a force in advancing the project and 
in allowing it to go forward? I also know there have been 
environmental concerns, and perhaps you can touch on that as 
well, and the role that the NGOs and the environmental groups 
have played in that particular project.
    Mr. Lowery. The NGOs--some of the NGOs were extremely 
concerned about this project back in the 2002-03 time frame. 
They were very worried that the project sponsors and the 
Government of Peru was not paying enough attention to 
environmental controls and erosion control, and to the actual 
fractionization plant that was put into something that was very 
close to a Ramsar site, which is something that the 
international NGOs care deeply about. And at the same time they 
also wanted to be involved in how, if you're going to do this 
and you're going to affect these communities, what is going to 
happen with the flows, and what is going to happen to these 
communities and how do they have a chance to argue their point 
of view?
    The IDB came in and, again, the United States did not 
support this program in the IDB because of some of these 
concerns, actually. But the IDB did try to play a better role 
in getting an ombudsman involved and trying to help some of the 
indigenous people about how they work with the country and work 
with the project sponsors. They have actually helped set up a--
some of the funds go toward the local groups.
    And I think that what the IDB is still trying to do is work 
with these NGOs on how you set up a better way of compensating 
some of the people that have been affected by this project, and 
particularly in terms of some of these spills that have 
happened. So the NGOs have been actually very involved, and I 
think the IDB has worked closely with them. I think some of the 
project sponsors have, as well. Obviously it's not a monolithic 
creature. I mean, some NGOs have different views than others.
    But we are of the view that Camisea has not been a success. 
I mean, we are of the view that it could have been better 
designed, it could have been--working with the NGOs could have 
been probably better handled, and the civil society groups. But 
at the same time it is an important project for Peru, and we're 
hopeful that given some of the lessons learned, that can be 
improved upon in the future.
    Senator Martinez. Anything else on that? Just the issue in 
general--and again I apologize if it has been covered--but the 
issue of corruption and the issue of transparency, would you 
touch on that in terms of the importance of avoiding those 
pitfalls and what you're doing in order to prevent the 
resources not going to the intended purposes, as I know so 
often in the history of our efforts, unfortunately the amount 
put in gets diminished by the amount that unfortunately doesn't 
end up in the right places.
    Mr. Lowery. I think that in terms of corruption, I mean, 
that is one of the key issues that we need to worry about, not 
just infrastructure projects, but all projects and all 
programs. Some of the times it's in budget support.
    We think that it's best handled in a variety of ways, first 
at probably the institutional level, which is we want the 
multilateral development banks to police themselves. They need 
to--you know, Paul Wolfowitz has been talking about this very 
well, and actually some of the other presidents in the MDBs, as 
the chairman mentioned in his opening statement.
    But then at the country level, I mean, what we have tried 
to do is help build up capacity; work with countries that are 
frankly implementing some better policies, and that's why we 
talk a lot about what we call performance-based allocation 
systems; and then working with the countries and working with 
the project sponsors on the actual project level. How do you 
set up mechanisms so that you have sound fiduciary measures, 
good procurement practices that meet best standards, and 
sometimes setting up mechanisms, depending on the case, on 
actual oversight of the funds, as was the case in Chad-
Cameroon.
    That doesn't mean that we're going to catch it all, but I 
think that the thing is to try to squeeze as much of the 
corruption and the problems out of the system as you possibly 
can. And I would say it's probably one of the top three or four 
priorities we have at the Treasury on how to deal with the 
multilateral development banks.
    Senator Martinez. Thank you, Mr. Chairman, and thank you, 
Mr. Lowery.
    The Chairman. Thank you very much, Senator Martinez. And I 
join the Senator in thanking you, Secretary Lowery, for your 
initial statement and your responses to our questions.
    I will now call on the second panel for our hearing today, 
and this will include the Honorable Jaime Quijandria, executive 
director at the World Bank; the Honorable Carlos Herrera 
Descalzi, former Minister of Energy and Mines, vice-dean of the 
National Engineers Association of Peru, from Lima, Peru; Dr. 
Korinna Horta, senior economist, Environmental Defense, 
Washington, DC.; and Mr. Manish Bapna, executive director, Bank 
Information Center, Washington, DC.
    We welcome this distinguished panel and look forward to 
hearing from each one of you. Let me say at the outset that 
your complete prepared statements will be made a part of the 
record, and you need not ask for this to occur. It will occur. 
We will ask that you either use those statements in their 
entirety or summarize, as the case may be, and I will ask you 
to testify in the order that I introduced you. This literally 
will be--let me just make certain I see where everybody has 
been placed--but first of all we will hear from the Honorable 
Jaime Quijandria, and then we will hear from the Honorable 
Herrera Descalzi, then Dr. Horta and Mr. Bapna, in that order. 
Would you please proceed.

  STATEMENT OF HON. JAIME QUIJANDRIA, EXECUTIVE DIRECTOR, THE 
    WORLD BANK, FORMER MINISTER OF ENERGY AND MINES OF PERU

    Mr. Quijandria. Thank you, Mr. Chairman, members of this 
committee, I am really honored and I want to thank you for this 
invitation to discuss this relevant aspect of the activities of 
multilateral development banks.
    As you probably know, Mr. Chairman, I was engaged with the 
project Camisea during 3\1/2\ years. I was Minister of Energy 
and Mines and Minister of Finance for a short period between 
July 2001 and November 2004, during Toledo's administration. It 
was during that period that the Camisea project was implemented 
in Peru. As you also mentioned, I represent Peru and another 
five South American countries, at the board of the World Bank, 
but I would like to clarify that my opinions on the subject in 
question compromise neither the Bank nor the Government of 
Peru. I am here as an energy policy practitioner, and I'm 
really delighted to share my experience.
    Camisea has been probably the most important example of 
policy continuity. The concept, the design, and the 
international bidding process took place during Fujimori's 
administration. The contract was signed during President 
Paniagua's administration. The construction took place during 
President Toledo's administration, and now president-elect 
Garcia has mentioned that he gives high priority to this 
project. I think that in the fairly unstable institutional 
framework that we have in our country, this symbol of 
continuity is an exception. We have had very few cases in our 
history where they have had this kind of consensus.
    Camisea was the biggest and most complex project ever in 
the history of Peru. That is why, when we assess its impact, 
both positive and negative, it's necessary to take a wide 
approach and remember what were the objectives of the project 
and probably what have been some effects, desired and not 
desired, of this project.
    After 2 years of operation, we clearly have the picture. It 
has increased gross national product by 1 percent, and is going 
to continue increasing national product for 30 years. Fiscal 
revenues have increased or are going to be increased $1.4 
billion, which is 90 percent of the total revenues of the 
country. An annual reduction of $500 million in fuel trade 
deficit has been made, and we are already still with a negative 
balance of trade.
    An average 30 percent reduction in electricity rates has 
been produced by the project, and obviously this reduction has 
benefited the poorest. New permanent jobs numbering 7,200 have 
been created, along with 15,000 temporary jobs.
    I want to stress very much that by law 50 percent of the 
royalties of this project and any other hydrocarbon project 
goes straight to the region, and that is very important because 
Camisea has produced a lot of revenues for the country and for 
the regions. And, second, a specific fund has been created to 
finance projects in Huancavelica, Cuzco, and Ayacucho, which is 
probably the area where the poorest population of Peru is 
concentrated.
    I call to your attention that 48 percent of the population 
of Peru live under the line of poverty, so Camisea has probably 
been a step in the right direction. It has benefited the poor, 
but in order to decrease poverty to the levels any government 
intended to, we probably need 10 or 20 Camiseas. It's not 
probably one single project that is going to solve this long 
national problem.
    We have mentioned in our statement some recommendations in 
order to improve both the operation of the government, IDB, 
NGOs, and companies involved in order to do the second stage of 
the project, if that is the case, in a probably better 
environment and probably giving room for all the lessons we 
have learned.
    As to the transparency of resources that have been received 
from the project, I want to make very clear that allegations 
that sums from Camisea have been taken to finance the Minister 
of Defense or other purposes, too, 50 percent of the revenues 
are going to the provinces and to the municipalities. There is 
an additional fund which takes 18 percent from the revenues of 
Camisea which goes specifically for three areas where the 
pipeline goes.
    So from the remaining part, which is property of the 
treasury, from the remaining parts some funds have been derived 
to the defense, not to buy arms. Probably it's part of the 
security situation of the country. As you probably know, Mr. 
Chairman, we had a tremendous guerrilla movement in the country 
not long ago, so there are still problems of security. And as 
money is fungible, we have given a very clear, a good example 
of how to finance our expenses, so there is going to be 
additional room to increase the funds of the Camisea fund.
    But in the last analysis, the problem now with Camisea and 
the population living there is not lack of resources. It's 
capacity to implement projects, capacity to design projects, 
and capacity to expend the money they have already received. 
Camisea has already collected $254 million in royalties for the 
region, and something like $38 million for the specific FOCAM 
fund which is going exactly to the three specific regions.
    And the problem is that local authorities are not familiar 
with the design of projects, with the execution, the approval 
of projects. Governments, IDB, NGOs, we have to help those 
local authorities, in order to enable them to have good 
projects and to have them in the shortest period of time, 
because this is again what we expect from the project.
    I would like to finalize this introductory statement going 
probably beyond the scope of the questionnaire that you were 
kind to send me. The committee's concern about the role of 
multilateral development banks in financing big infrastructure 
projects, particularly energy sector projects, coincides with 
the discussion of the financing of extractive industries that 
took place at the World Bank board of directors during the last 
2 years.
    During these discussions, in which governments, private 
companies, NGOs, and the academic world participated, 
maximalist positions were presented, such as the withdrawal of 
multilateral organizations from the financing of these 
industries. Fortunately, the final consensus was reached on the 
need to continue and increase the financial support to this 
project, but at the same time to incorporate highest 
environment and social standards when assessing these projects.
    On the other hand, there is ample empirical evidence 
provided by the World Bank and the Inter-American Development 
Bank showing that there is a high correlation--you have 
mentioned that, Mr. Chairman--between the investment in 
infrastructure and growth of the GNP. Moreover, considering the 
deficit in infrastructure in Latin America, especially in 
energy infrastructure, a recent study by the World Bank shows 
that if the region had increased its level of investment in 
infrastructure to equal those reached in the Asian region in 
the last 20 years, its GNP would have gone up 2 percentage 
points on average.
    In the case of the Camisea project, out of the total 
investment required for the implementation of the first phase, 
which went up to $1.6 billion, totally financed with private 
sector, the Inter-American Bank contributed with $75 million 
for the construction of the gas pipeline. Even if the Inter-
American Development Bank, at the request of some NGOs not in 
agreement with Camisea, had decided not to participate in the 
financing, the project would still have been carried out.
    For this reason, I clearly support the engagement of 
international financial institutions in infrastructure 
projects, particularly energy-related ones. The design and the 
evaluation of projects, especially those on social and 
environmental matters, will benefit from the lessons learned by 
this institution.
    To conclude, Mr. Chairman, I agree with the statement of 
Domingo Cavallo, ex-Minister of Finance of Argentina, before 
this Committee on Energy Security. I am quoting him: ``South 
America's self-sufficiency in terms of energy has been 
deteriorating as a result of populist policies and short-term 
objectives.'' In this sense, Camisea, with its second phase 
about to start, represents a step in the right direction and, 
depending on the magnitude of reserves we are able to discover 
and exploit, will contribute to the security of South America 
and eventually to the whole hemisphere.
    Thank you.
    [The prepared statement of Mr. Quijandria follows:]

 Prepared Statement of Hon. Jaime Quijandria, Executive Director, The 
        World Bank, Former Minister of Energy and Mines of Peru

    Mr. Chairman, members of this committee, thank you for inviting me 
to discuss this relevant aspect of the activities of multilateral 
development banks.
    First, let me start with a brief comment on my experience 
concerning the main subject of this hearing. Over the last 15 years, I 
have been involved with energy issues and different ways of financing 
energy-related projects. During this period, I held high-level 
positions, both in the public sector (chairman of the state-owned 
petroleum company Petroperu) and the private sector (chairman of the 
YPF's Peruvian subsidiary). I was also engaged in energy policy issues 
as I was Minister of Energy and Mines and Minister of Economy and 
Finance from July 2001 to November 2004, during President Toledo's 
government. It was during this period that the Camisea project was 
implemented in Peru.
    At present, I represent Peru and five other South American 
countries as executive director at the board of the World Bank.
    In spite of what I have just stated, I would like to clarify that 
my opinions on the subject in question compromise neither the bank nor 
the Government of Peru.
    I will now address the questions submitted by this committee in Mr. 
Chairman's kind letter of July 6, 2006, inviting me to this hearing.
    Camisea was the biggest and most complex project in the history of 
Peru. That is why when assessing its impacts, both positive and 
negative, it is necessary to take a wide approach and remember the 
economic situation, and the situation of the energy sector, in the year 
2000. Although Peru has significant reserves of natural gas discovered 
by Shell in 1984, due to a lack of political consensus on the most 
appropriate way to give value to this source of energy, the country was 
dangerously more and more dependent on over $1 billion worth of imports 
of petroleum and its derivatives. Meanwhile, electricity rates, which 
are to some extent related to the prices of petroleum and its 
derivatives, threatened to go up significantly.
    This scenario changed radically as of August 2004 when the 
operation of the Camisea project started. Two years later, the 
following positive impacts of its implementation were identified:

   An annual GDP increase of 1 percent throughout the life of 
        the project (30 years).
   Fiscal revenues of $1.4 billion (19 percent of total 
        revenues).
   An annual reduction of $500 million in the fuel trade 
        deficit (the balance of trade, however, remained negative).
   An average 30 percent reduction in electricity rates (these 
        rates are calculated based on the effects of projects 4 years 
        before the implementation phase starts). Obviously, this 
        reduction benefited the poorest.
   7,200 new permanent jobs and another 15,000 temporary jobs.
   By law, 50 percent of the royalties were transferred to the 
        producing region (Cuzco) and an intangible fund was created to 
        finance projects in the regions affected by the project.

    I would like to mention that there is no existing legislation in 
any of the other South American countries that mandates the transfer of 
such level of resources to the regional and municipal authorities.
    Moreover, I have to add that putting a value on these reserves not 
only reduces the dependency on energy imports but it also opens a 
window of opportunity for the export of LNG to Mexico and the United 
States, as well as to other countries. In his recent visit to Chile, 
President-elect Alan Garcia highlighted the importance of the second 
phase of the Camisea project.
    I have already referred to the benefits derived from the Camisea 
project for the population as a whole. In the case of the poorest, the 
project allows a reduction in electricity rates just when the 
international price of crude oil jumped from $25 to $70 per barrel. 
Just imagine what would have happened in Peru in 2005 and 2006 if, as 
was the case for the last two decades, the implementation of the 
project had been postponed.
    Furthermore, the infrastructure resulting from this project is 
located in the departments of Cuzco, Huancavelica, and Ayacucho, where 
a high percentage of the population lives under the poverty line.\1\ It 
is precisely in these departments where health infrastructure, more 
than 600 kilometers of highways, and 20 bridges were built.
---------------------------------------------------------------------------
    \1\ According to the National Institute of Statistics, 48 percent 
of the population remained under the poverty line in 2005.
---------------------------------------------------------------------------
    The Camisea project has certainly had negative effects on the 
populations living in the area involved. In particular, the indigenous 
people who live near the gas production facilities have been affected 
the most. The impact is even worse since some of these indigenous 
populations had had no contact with the outside world until the project 
started. In this respect, some of the lessons learned are taken from 
the recommendations made by different national and international 
organizations in order to mitigate the negative impact resulting from 
the implementation of the second phase of the project (exploitation of 
lot 56). In particular, I would like to refer to the set of detailed 
recommendations contained in the ombudsman's report,\2\ which I think 
should be discussed and eventually implemented before starting the 
following phase of the project.
---------------------------------------------------------------------------
    \2\ ``The Camisea Project and Its Effects on the People's Rights,'' 
Ombudsman's Report No. 103, March 2006.
---------------------------------------------------------------------------
    The main recommendations in the ombudsman's report are as follows:

   Approve specific regulations to effectively protect the 
        rights of the indigenous populations in isolation and at first 
        contact;
   Determine assessment criteria that ensure fair compensation 
        for the damages caused;
   Design and implement mechanisms that ensure fair 
        negotiations and technical assistance to the indigenous 
        communities;
   Modify the current legislation on right of way;
   Intensify the state control over the environmental and 
        social commitments undertaken by the companies involved;
   Strengthen the performance of technical and 
        multidisciplinary inspections of the works that the project 
        entails;
   Extend the period between the release of the studies on 
        environmental impact and the public hearings.

    When the decision to go ahead with the Camisea project was taken, 
the Government of Peru was aware that a project of this importance and 
complexity, and which touched very sensitive territories of the 
country, required compliance with careful social and environmental 
policies. It was with this aim in mind that the Government of Peru 
proceeded from start.
    Thus the Department of Environment, within the Ministry of Energy 
and Mines, was responsible for holding public preliminary hearings on 
Camisea and its impacts and evaluating the studies on environmental 
impact presented by the companies involved in the project.
    Additionally, the Government of Peru considered necessary to 
strengthen the capacity of the state agencies responsible for 
overseeing the environmental and social aspects of the Camisea project, 
to ensure the sustainable development of the area involved, and to 
protect the most vulnerable communities.
    The Government of Peru also started a program, financed with a loan 
provided by the Inter-American Development Bank, aimed at strengthening 
supervision and monitoring capacities, protecting sensitive 
biodiversity areas and supporting regional and local governments.
    With a staff of 25 environmental specialists, OSINERG is 
responsible for the supervision and monitoring of the environmental 
impact resulting from the Camisea project. So far, OSINERG has carried 
out 580 inspection visits to the project sites and detected up to 3,078 
irregularities, 89 percent of which have already been corrected. 
Meanwhile, court decisions are pending involving 33 of the 329 
remaining irregularities.
    The project is also supervised by DIGESA, an agency within the 
Ministry of Health that monitors the quality of the water, and by 
INRENA, which is responsible for protecting the natural resources. 
Further monitoring of the project is carried out by the indigenous 
communities with the sponsorship of the Government of Peru, the 
companies, and civil society organizations.
    The coordinated work of these three agencies--OSINERG, DIGESA, and 
INRENA--aims at ensuring adequate management of the environmental 
impacts and has led the companies involved in the Camisea project to 
comply with the guidelines set by the EIA.
    As an additional important measure, more than 7,000 deeds granting 
ownership rights over land along the gas pipeline were issued. There 
were 2,000 compensation cases for land expropriation, 95 percent of 
which were fairly settled. As for the pending cases, the Government of 
Peru is working on improving the existing legislation.
    The office of the ombudsman was created as an impartial entity 
within the Catholic University of Peru, responding to the Government of 
Peru's concern about the need to establish a conflict resolution 
mechanism. So far, the ombudsman has received 680 complaints, 87 
percent of which have already been settled.
    I would like to make a general comment beyond the scope of the 
questionnaire I was provided with.
    The committee's concern about the role of the multilateral 
development banks in financing big infrastructure projects, 
particularly energy sector projects, coincides with the discussion on 
the financing of extractive industries that took place at the World 
Bank's board of directors' meetings for the past 2 years. During these 
discussions, in which governments, private companies, NGOs, and the 
academic world participated, maximalist positions were adopted such as 
the withdrawal of multilateral organizations from the financing of 
these industries. Final consensus was reached on the need to continue 
and increase the financial support to these projects but at the same 
time to incorporate the highest environmental and social standards when 
assessing these projects.
    On the other hand, there is ample empirical evidence, provided by 
the World Bank and the Inter-American Development Bank, showing a high 
correlation between investments in infrastructure and growth of the 
GDP. Moreover, considering the deficit in infrastructure in the Latin 
American region, a recent study by the World Bank \3\ shows that if the 
region had increased its levels of investment in infrastructure to 
equal those reached in the Asian region in the last 20 years, its GDP 
would have gone up 2 percentage points on average.
---------------------------------------------------------------------------
    \3\ See Marianne Fray and Mary Morrison, Infrastructure in Latin 
America and The Caribbean: Recent Development and Key Challenges, World 
Bank Report No. 32.640-LCR, August 2005.
---------------------------------------------------------------------------
    In the case of the Camisea project, out of the total investment 
required for the implementation of the first phase, which went up to 
$1.6 billion, the Inter-American Development Bank contributed only $75 
million for the construction of the gas pipeline. Even if the Inter-
American Development Bank, at the request of some NGOs, had decided not 
to participate in the financing, the project would still have been 
carried out. At some point even the sponsors of the project considered 
withdrawing the request for financing due to the delay and uncertainty 
of the procedure. At the request of the Peruvian Government, the 
paperwork was completed and the loan was approved. For this reason, I 
clearly support the engagement of the international financial 
institutions in infrastructure projects, particularly energy-related 
ones. The design and evaluation of projects, especially those on social 
and environmental matters, will benefit from the lessons learned by 
these institutions.
    In sum, urgent infrastructure projects like Camisea will be carried 
out with or without the assistance of multilateral financial 
organizations. There are clear environmental and social advantages if 
organizations like the World Bank and the Inter-American Development 
Bank continue to expand their portfolio of infrastructure projects, 
particularly energy-related projects.
    To conclude, I agree with the statement of Domingo Cavallo, ex-
Minister of Finance of Argentina, before this Committee on Energy 
Security: ``South America's self-sufficiency in terms of energy has 
been deteriorating as a result of populist policies and short-term 
objectives.'' In this sense, Camisea, with its second phase about to 
start, represents the step in the right direction and, depending on the 
magnitude of the reserves to be discovered and exploited in Peru, will 
also contribute to the security of South America and, eventually, of 
the whole hemisphere.
    Thank you very much.

    The Chairman. Well, thank you very much for that very 
important testimony. I would like to call now upon Mr. Herrera.

 STATEMENT OF HON. CARLOS HERRERA DESCALZI, FORMER MINISTER OF 
ENERGY AND MINES, VICE-DEAN, NATIONAL ENGINEERS ASSOCIATION OF 
                        PERU, LIMA, PERU

    Mr. Herrera. Mr. Chairman, members of the committee, I 
deeply appreciate this opportunity of being in front of you in 
order to talk about Camisea project. My background is that I am 
working in energy sector since 30 years as consultant, as 
engineer, as university professor, and of these 30 years, 8 
months as Minister of Energy and Mines during the transitional 
government.
    In that moment it was my responsibility, the signature of 
original contracts of Camisea project, and we did it because we 
considered that Camisea was a very, very important project for 
the country. Peru lacks hydrocarbon reserves. Peru became twice 
in its life a net importer of oil, and we are still net 
importer, even with Camisea, so we need to find more resources.
    But Camisea, in my opinion, was not a project addressed to 
reduce prices. The real sense of Camisea was energy security, 
because we need to think in a broader sense, in a long time. 
Many promises of Camisea were tied to prices. We cannot fulfill 
them. We cannot meet them any longer. Last week a new law has 
been passed, which objective is to raise the tariffs.
    The facts are, we have had five spills with the pipeline. 
This is a fact. Another fact is that the feeling of the people 
is that they are not being reached by the benefits of Camisea. 
They consider that the promises were too much, and what they 
really received is too few. If we go and compare this with the 
votes during the elections, the areas where Camisea project is 
voted for Humala, with a very high score in favor of him.
    The fact is that a congressional committee, after 3 months 
of investigations of Camisea results, involving five members of 
the congress and several people, they arrived to some 
conclusions in their report. One of them is that the main aim 
of the government was to arrive on time, to meet the dates for 
the inauguration of the project, and the quality of the project 
has been sacrificed in front of this goal.
    They also find political responsibilities in the ministers 
during the construction period, and they also find 
administrative and even criminal wrongdoing of officials. One 
of the most respected newspapers of the country make an 
independent report about the benefits to the people in the 
region where Camisea has been built, and they find that the 
performance was wrong. Peru is a country where one of each four 
citizens doesn't have access to electricity. The poorest people 
do not have electricity, so very difficult the benefits of 
Camisea will reach those people through electricity.
    As I told you, the essence of Camisea was energy security. 
Export was a secondary objective, after the first. Only after 
local energy needs have been warrantied, the legal framework 
and the contracts of Camisea have been modified to allow 
export, that were supposed to be destined to Peru. In my 
opinion, the development of Camisea II shall not come at the 
cost of not meeting the objectives of Camisea first stage. This 
is the main point.
    Regarding the multilateral development banks, I think that 
it's much better that they are there. It's much better that 
they participate in these projects. Without them, the standards 
will not be met.
    I understand that the performance has not been good, that 
what was planned has not been really accomplished, but this is 
not a problem of whether the standards, this is a problem of 
implementation. It is necessary to support strongly the country 
in the capacity of implementing those plans. Otherwise, we will 
not succeed.
    And looking at the future, I will be for expanding Camisea. 
It's my opinion. It's a requirement of the country. It's a 
requirement of the region. I will be for the necessity of the 
support from the banks, but they, as I said, need to improve 
their capacity to ensure that the standards are implemented.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Herrera follows:]

Prepared Statement of Hon. Carlos Herrera Descalzi, Former Minister of 
 Energy and Mines, Vice-Dean, National Engineers Association of Peru, 
                               Lima, Peru

    Since very early on in its history, Peru has been an oil producing 
country. In fact, the second oil well in the world to be drilled was in 
Peru in 1863.
    In the first half of the 19th century, Peru started to produce and 
export oil; being an oil producer, in middle of 20th century, the 
Peruvian population was encouraged to consume oil rather than any other 
kind of fuel. At that time, Peru's energy supply was mainly composed of 
hydropower and oil. With regard to the power sector, even today, Peru 
continues to have a very important hydroenergy potential that is 
several times greater than its today's consumption.
    As local oil consumption was increased and the depletion of oil 
production started, in 1968 the situation in Peru changed to become a 
net oil importer. Considerable effort was dedicated to finding new 
reserves, only succeeding at the end of the 1970s; an oil pipeline was 
built, that conveyed oil from the northeastern Amazon forest to the 
coastal line where the two main refineries were located. At the 
beginning of the 1980s, Peru recovered its condition as an oil 
exporter, and then, in the middle of that decade, the reservoir of 
Camisea, in the central region of the Amazon forest was found.
    Shell was the company who found Camisea's reserves. As it was 
difficult to arrive at an agreement with the Peruvian Government, they 
decided to leave. Later on, they returned and agreed a program at the 
beginning of the 1990s. Finally in 1998, Shell decided not to continue 
in Peru and to withdraw, thereby returning the gas fields with proven 
reserves to the Peruvian Government.
    Meanwhile, at the beginning of the 1990s, once again Peru became a 
net oil importer due to the decline in the production of the new fields 
in the Northeastern Amazon Forest, which were found at the end of the 
1970s. Efforts were made to carry out more exploration in the jungle 
and offshore, so wells were drilled, but unsuccessfully. Since then, 
every year the negative gap between oil production and consumption 
increased, in detriment to the Peruvian commercial balance and economy. 
The only hydrocarbon resource of significance was that of Camisea, 
where roughly 80 percent of the energy content was in gas and the other 
20 percent were condensates; however, from an economical point of view, 
that 20 percent of condensates represented 50 percent of the economical 
value of the field.
    Once Shell withdrew its operations from Peru, after a process, the 
government tendered Camisea project, dividing the project into three 
parts: (i) field exploitation; (ii) transport of liquids and gas; and 
(iii) gas distribution in Lima and Callao. The field winning bid was 
granted in February of 2000 and those of transport and distribution 
were granted in September of that year; however, government delayed its 
approval to the signature of the contracts. At this point in time, in 
November 2000, Peru's President resigned by fax, he himself being out 
of the country at the time. An interim government was charged to rule 
the country during a transition period until a new government was 
elected. After elections carried out in May of 2001, a new government, 
the current one, was elected for the period 2001-06, and it will 
conclude its mandate at the end of July 2006. Now, recently, a new 
government has been elected for the 2006-11 period.
    In December of the year 2000, following the revision of Camisea 
contracts and some modifications intended to fortify the social 
benefits of the project, the transition government authorized its 
signature. The contracts were made public and published on Internet; 
they are still available there.
    Previously and along year 2000, Camisea had become a controversial 
project because of complaints from many sides, especially those 
received from the Cusco region where the resources were located, due to 
the fact that they considered that they deserved more benefits and 
wanted that the pipeline will arrive to Cusco; also because of the fear 
of the environmental and social impacts on the native population of the 
area. In that period, Camisea's contracts were kept nearly as a close 
to be a secret.
    As economical strategy, Camisea was destined to modify the energy 
consumption matrix of Peru. The aim was to change the country's trend 
to oil in favor of a preference to natural gas, based on the proven 
reserves left by Shell.
    Camisea natural gas was destined to replace the existing oil 
derivatives used in power generation, industrial field consumption, 
public transport, and domestic consumption.
    Camisea involves four contracts: (1) for the field, (2) for the 
transport of liquids, (3) for the transport of gas, and (4) for the gas 
distribution.
    Field contracts fixed wellhead gas prices, to be escalated 
according to a basket of residual oils formula. Transport and 
distribution contracts also contain formulas for escalating prices.
    Gas exportation was allowed, conditioned to priority supply to 
internal market. It was agreed that to consider internal market supply 
as ensured, remaining reserves shall be able to supply local market 
requirements in next 20 years. This evaluation will be made on an 
annual basis, in order to allow the exportation in this year. This 
mechanism looked for to incentive the finding of new reserves for an 
exportation market, while ensuring the local market sufficiently in 
advance so as to when it arrive to be impossible, there will be a 
period of 20 years as to find and implement a new solution, before 
local reserves became completely depleted; the aim was energy 
independence.
    Camisea Field Contract matters Block 88. Its proved reserves will 
allow the exportation since the beginning, but they cannot sustain it 
for a period of 20 years, without finding new reserves. The finding of 
new reserves and the risk of none succeeding belonged to field's 
concessionaire.
    A legal framework protected the compromises: Gas Law (Law 27133), 
Gas Law Ruling and Camisea contracts. Gas Law and Gas Law Ruling were 
invoked by contracts.
    During this current government, priorities were inverted, 
privileging Camisea natural gas exportation rather than local market 
satisfaction.
    At the beginning there was an attempt to modify royalties, 
diminishing them for reserves dedicated to exportation. As former 
minister, I expressed my objection, due to the fact that the only 
bidding criterion to be the winner of Camisea tender was precisely the 
largest royalty percentage to be paid. Because of this the winning bid 
for the field contract was allocated to a consortium of small- to 
medium-sized companies who offered to pay a royalty of 37.24 percent 
rather than to a big and much more qualified bidder who offered 35.5 
percent as royalty. Moreover, the fact that most of the gas was going 
to be assigned to exportation, could left the suspect of an underhand 
maneuver to grant the winning bid to one particular party with 
afterwards lower royalties.
    Financing of the project was not an obligation of Peruvian 
Government; the companies were selected because they shall be able to 
finance the project by themselves. Economy and energy ministers 
dedicated their effort to finance Camisea and local consumer was 
forgotten. No effort was dedicated to local development; after the gas 
arrived to Lima in August of year 2004 and consumers asked how to 
benefit from it, just government realizes that there were as their 
duty.
    Moreover, government forced local consumers to finance companies. 
In order to make the construction of the Camisea Gas Pipeline feasible, 
faced with the lack of a sufficient initial gas demand as to ensure 
return on the investment, consumers shall pay within its electricity 
service monthly bill a contribution to pay the nonused capacity of gas 
pipeline. This subsidy was justified by the benefits of lower power 
generating costs, as consequence of the availability of a cheaper fuel, 
as it will be the gas. This commitment presupposed that this payment 
would be effective once the service was available. However, in November 
of year 2002, government authorized a payment in advance, that resulted 
in a public contribution of nearly 100 MMUS $ for pipeline 
construction, against a reduction on gas transport tariffs.
    In case of none being possible to continue with Camisea consortia, 
the other bidder (Total Fina) was available to take it over.
    During the construction period of the project, several other 
modifications were made to the contracts, which at the end operate 
against consumer's interests, as it was with modifications made to the 
gas distribution contracts. Transport and distribution projects were 
bided with a tariff fixed in advance and that in distribution shall 
last for 8 years; rules were changed against the consumers: Residential 
tariffs were increased in more than 40 percent at the beginning of 
supply, with approval of General Bureau of Hydrocarbons (Ministry of 
Energy and Mines).
    The distribution contract established an obligatory minimum yearly 
goal of number of effective residence gas connections. The condition of 
effective supply was modified to potential supply, meaning that to 
fulfill the compromise it was not longer necessary that consumers were 
connected; but rather when distribution lines passed near to his 
residence.
    Whilst the gas pipeline was still being constructed, news arrived 
appertaining to the noncompliance of regulations concerning the 
environmental conservation and the effects that the project would have 
on native communities. It appeared that the press always kept quiet 
about or minimized the facts.
    The final location of the liquids pipeline (now with five accepted 
leaks) was not Pisco/Paracas where a nature reserve is; final location 
was 70 km north from there and to be changed required the approval of 
Ministry of Energy and Mines.
    Contractually, the discharge of the condensates pipeline was to 
terminate in a point on the coast close to the fractioning plant. This 
was Pampa de Clarita, in the Province of Canete, Department of Lima, 
located approximately 70 km north of Pisco (contract mentioned as 
geographical coordinates 13.15466+ south and 76.36996+ west). This 
location could be changed by mutual agreement between the companies but 
always with the consent of the Ministry of Energy and Mines. Companies 
asked to move that point to the buffer zone of Paracas Bay only natural 
reserve in Peru's coastline. It was accepted by the authorities. 
Organizations of citizens and NGO's, which were fighting to preserve 
nature, protested and a period of discussions was commenced. These 
discussions concerned the offshore installations but not the ones 
onshore. Authorities then accepted construction in the onshore zone, 
whilst they continued to discuss the offshore zone, until they were 
faced with the fact whereby to modify the marine location would oblige 
them to move the onshore installations, which meant that the project 
would not be built within the preestablished timeframe. This was how it 
was accomplished to install the terminal near to the Paracas Reserve 
zone, completely ignoring all of the protests. On the other hand, a 
program to muffle this situation was defined with the credit support 
from the international development banking institutions.
    During the construction phase and with the object of distracting 
the public opinion from the difficulties and focusing it on the 
benefits involved, it was continually announced that the arrival of 
Camisea would benefit everybody by reducing the price of gas and 
electricity; promises continued even when they became unsustainable. 
Just a few days after the construction was completed and a new 
reduction of electricity tariffs was promised, the electric tariffs 
were raised and the LPG--which was the only gas known to the population 
in Lima--went up.
    On the other hand, the industrial companies that accepted to 
purchase gas since the beginning of the project were more benefited 
than they expected, because the international prices of the fuel had 
risen considerably, which made using gas more advantageous. However, 
this benefit was not enjoyed by the public in general. The application 
in the electric generation could not be initiated immediately to full 
capacity in the plants which had been converted to gas. The restriction 
was due to the fact that the distribution tubing was built with less 
capacity than was necessary. This resulted in Electroperu as prejudiced 
party. Electroperu is a state-ruled company that formally belongs to 
state pensioners. As ruled by state, they fear to initiate a reclaim 
against gas supplier.
    Within this climate, failures in the pipeline that transported the 
liquids began to occur, causing spillage of said liquids and damage to 
the environment, and in particular to the water currents that provide 
the fish that are part of the diet of the native inhabitants of this 
area. When the first failure took place, while initially being 
surprising, there was a generally comprehensive attitude, accepting 
that eventualities could occur. However, the failures continued, even 
though an effort was made by authorities and companies to convince the 
public that this was a normal situation.
    Under these circumstances, in year 2006, in a public hearing of the 
IDB in Washington, it was claimed that the tubing had been constructed 
without sufficient quality and with negligence as far as the materials 
and specialized workmanship were concerned; that the hurry to catch up 
on deadlines and the lack of economical resources had brought about 
these consequences. The accusation indicated that throughout the extent 
of the tubing, there had been many susceptible zones which could be 
likely to suffer further failures. This latter comment coincided with a 
rather ignored similar appraisal carried out some weeks before by 
OSINERG, the regulating organism and supervisor of the investment in 
energy.
    The potentiality for new failures and the accusations of lack of 
quality were denied by the companies and by the authorities; this took 
place while the political campaign for the election of a new president 
of the republic was in full swing. Under these circumstances, a new 
failure of a larger dimension than the previous ones occurred. Without 
obtaining more information, the prime minister attributed it to an act 
of sabotage, an explanation which was difficult to accept. On this 
occasion, the press was overly generous when dealing with the subject; 
the television transmitted images of a hut and domestic animals burned, 
indicating that also two children had been severely wounded by the 
explosion that followed the gas leak. This occurrence was heard of far 
and wide. The political candidates from all the tendencies condemned 
the event and demanded investigations considering even the 
renegotiation of the gas contracts. This situation was followed by open 
requests of renegotiation to other sectors, mainly the mining.
    In the congress, an investigative committee was constituted; the 
executive designated a committee in charge of hiring an audit; the 
Association of Engineers indicated that, without a doubt, faults in the 
engineering or in the construction existed that were undoubtedly the 
responsibility of the company that owned the tubing. The discussions on 
this subject led to accusations that members of the government, 
including the prime minister, were alternating between working for the 
state and for the company, which led to a request for impeachment in 
the congress.
    In the time passed until now, the investigative committee of the 
congress has issued a report indicating that a presumption of guilt 
exists that should be investigated by the district attorney. The 
Association of Engineers, in their quality as representative of the 
civil society in the committee in charge of hiring the tubing audit, 
has manifested their discrepancy; as in reality, this audit is only 
being carried out by the state as it excludes all environmental and 
community aspects, as well as all the phases up until the construction 
and also for being in disagreement with the terms of reference, for 
which reasons they have preferred to withdraw their participation.
    The primary rationale for the project--shifting the country toward 
cheap natural gas--was energetic independence, a cleaner and cheaper 
fuel was an up side: Peru's dependence on oil in commercial energy is 
strong and one third of the consumed oil is imported. The exportation 
project is against the objectives of the project; in the first 20 years 
4 TCF will be dedicated to local market while 4.2 TCF were dedicated to 
exportation.
    Changes to Camisea I means to embark Peru into a new source of 
energy that after initial stage to win the market (around 10 years), as 
adult will not have the strength to sustain the next 15 years, not 
being that new important reserves will be found. Does it have a 
strategic meaning for a country?
    Camisea II is the mutation of a national effort for a shift from 
oil to natural gas into an exportation project to favor a company.
    To move from one condition to the other (old to new Camisea), it 
was necessary to produce significant changes to the legal frame; those 
changes have been made systematically, along the time, hiding the real 
aims and negating in front of the people the real intentions; it has 
been supported by people inserted in key positions of the government; 
all of this turns the process into illegitimate.
    Camisea's contracts and the legal framework were systematically 
modified in order to benefit and prioritize the exportation without the 
obligation to find new reserves. So it was that the Gas Law Ruling, the 
Gas Law itself, and finally the Camisea contract were successively 
modified.
    As an example of how it proceeded, to modify the Gas Law, it was 
figured out a situation to change its article No. 4; this situation was 
one of sending gas to atmosphere in Peru's northern coast fields. In 
order to correct that situation, it was proposed to add two subpoints 
``c'' and ``d,'' to article No. 4. It was accepted by congressmen and 
like it was proposed, it was innocuous for Camisea's contract. But 
without reporting, the new writing also deleted part of subpoint ``a,'' 
which resulted in an insurmountable obstacle to modify Camisea gas 
field contract as to allow exportation without finding new reserves. 
None of the debates included the issue of subpoint ``a,'' which was the 
real objective of this modification. Months later, dated as November 
30, 2005, and invoking this change in subpoint ``a,'' modification of 
Camisea field contract was dictated by Supreme Decree No. 050-2005-EM, 
allowing the company involved to dispose for exportation part of the 
reserves that were contractually destined for the internal market.
    The Block 56 contract (Pagoreni, with proven reserves found by 
Shell and returned in late-1990s to state) is so uneven and harmful in 
royalties and tax benefits that will bring resistance in future, when 
more people arrive to understand its meaning.
    The forgetfulness to local market and initial objective of the 
project shall also be a responsibility of banks.
    The way in which the resources to the inhabitants of the forest had 
been supplied is also a big mistake; poor effort was made in obtaining 
something positive; just to provide money, no matter what they will do.
    Pleasing attitudes of Peruvian authorities in front of poor 
construction or operation created social mistrust on all authorities, 
companies, and institutions; this feeling is now extending to other 
sectors (mining, energy, communications), and to the privatization 
process of the 1990s. After the fifth leak, prime minister accepted in 
congress that he was linked to Camisea's companies.
    The atmosphere created about the nonlegitimacy and even illegality 
of the process that converted Camisea I in Camisea II (modification of 
contracts and laws, special laws for Hunt Oil, participation of prime 
minister, way in which gas law was modified via a trojan horse asking 
to add something to one article and without permission deleting key 
words of the same article) will certainly bring problems for the 
future; indeed, it has already caused problems: credibility of 
government (and also of institutions like IDB) is in question; voices 
have risen asking the revision of Camisea's contracts, with risk of 
extending to all mining and energy companies.
    One of the main concerns is royalties indicated in contract for 
Block 56. The exportation project was analyzed and considered 
economically feasible for an international (Henry Hub) price of US 
$3.2/MMBTU; it was announced with royalties of 38 percent, more than 
Camisea (37.24 percent). But it was not mentioned that royalties will 
not be paid on international price, but roughly on one seventh of 
international price (according to a table of clause), meaning that real 
royalty was 5-6 percent; in addition, for prices over US $10/MMBTU 
royalties will be paid as for US $10/MMBTU.

    The Chairman. Thank you very much, Mr. Herrera, for your 
testimony.
    I would like to call now on Dr. Korinna Horta.

STATEMENT OF DR. KORINNA HORTA, SENIOR ECONOMIST, ENVIRONMENTAL 
                    DEFENSE, WASHINGTON, DC

    Dr. Horta. Thank you, Mr. Chairman and members of the 
committee, for the opportunity to contribute to this important 
process, which we hope will result in measures to obtain 
greater oversight and improvements in the development 
effectiveness of MDB lending for large-scale infrastructure.
    In addition to my own organization, Environmental Defense, 
a national environmental organization with about 400,000 
members, my statement is made on behalf of two highly 
respected, international award-winning nongovernmental 
organizations in the countries directly concerned with the 
Chad-Cameroon oil and pipeline project: The Chadian Association 
for the Defense and Promotion of Human Rights, based in 
N'Djamena, Chad, and the Center for Environment and Development 
in Yaounde, Cameroon.
    Although the situation in Chad differs from the one in 
Cameroon, both countries are governed by authoritarian regimes 
known for corruption and human rights abuses. My African 
colleagues work under challenging circumstances and often at 
risk to their personal safety. Our organizations have worked 
together to monitor the oil and pipeline projects since we 
first learned about World Bank plans to finance this project 
about 10 years ago.
    At a cost of about $4.2 billion, this project represents 
the single largest investment in sub-Saharan Africa today. It 
includes the development of oil fields in southern Chad and the 
construction of a 655-mile-long pipeline through neighboring 
Cameroon to the Atlantic coast. The Exxon Mobile-led consortium 
behind the project made construction dependent on the World 
Bank's participation as an insurance policy against political 
risk in a highly volatile region.
    Unfortunately, oil production in African countries has 
often brought, instead of prosperity, greater poverty, 
destruction of the environment, human rights violations, and 
sometimes violent conflict. African and international 
organizations, as well as voices in the United States Congress, 
called on the World Bank to delay financing of this project 
until effective measures to protect human rights and the 
environment had been put in place and the governments 
demonstrated their commitments to poverty reduction.
    But, despite these expressions of concern, the World Bank 
approved financing for the project in 2000 and first oil was 
exported in 2003. From the outset, the World Bank viewed this 
project as a model for large-scale infrastructure investments 
in extractive industries. Poverty would be reduced while the 
environment would be protected.
    But reality has turned out to be quite a different matter. 
The innovative revenue management system the World Bank put in 
place in Chad to ensure that oil revenues be mostly used for 
antipoverty efforts is in deep trouble. The World Bank's 
capacity-building project, which intended to ensure that the 
governments would be able to manage revenues and address the 
environmental and social impacts of the project, has largely 
been ineffective.
    While Chad's oil revenue management system was troubled 
from the beginning, the crisis broke into the open in January 
2006. That is when President Deby of Chad effectively gutted 
the poverty reduction intentions of the original revenue 
management law that had been agreed to with the World Bank. 
Essentially, President Deby needs to buy weapons.
    While the worsening security situation in Chad is complex, 
the question of who gets to control the oil revenues looms 
large in a power struggle within President Deby's own ethnic 
group, whose traditional homeland is on Chad's eastern border 
with Sudan, that is, Darfur. The stakes are high, and clearly 
oil money is further exacerbating an already bad governance 
situation.
    After temporarily suspending loans, disbursements have 
resumed, and the World Bank is now negotiating a new agreement 
with Chad, scheduled to be concluded by the end of September. 
My written statement goes into more detail about the impacts of 
the project, but here I would like to relate something more 
directly on a human level.
    Last fall I visited the village of Nkoltara in Cameroon, 
which is on the pipeline route and just 15 miles north of the 
capital of Yaounde. Amongst the people I met there was a woman 
desperate about the future of her children. She told me that 
before pipeline construction she was making enough money from 
raising chickens to afford to rent a room for her school-age 
children in the nearest town so that they could attend school. 
She was, however, unfortunate in that some of the most 
intensive construction noise occurred in front of her house. As 
a result, all the young chicks died, and she received no 
compensation to replace them. Now there is no money to rent a 
room for her children and they no longer go to school.
    In the same village, the water source is adjacent to signs 
indicating where the pipeline is buried. The water seemed to be 
covered by a milky film of grease, yet this is where the 
children, clothed in tattered rags, were lining up with buckets 
of different sizes to fetch their families' water supplies. 
According to the villagers, skin rashes, gastrointestinal 
disorders, and other previously unknown ailments are now 
widespread in the community. Mr. Chairman, this is not a unique 
case. NGOs in Cameroon have documented hundreds and hundreds of 
similar cases.
    What about Chad? In a recent interview, the Catholic Bishop 
of Doba, the main town in the oil-producing region, described 
the project as having brought prostitution, alcoholism, and 
environmental degradation to the region. To highlight the lack 
of development benefits, he cited the village of Kome, which is 
still waiting for a simple water well, despite the fact that it 
is located adjacent to Exxon Mobile's 21st century, state-of-
the-art local headquarters. The Bishop added that he was glad 
to see that the project had built some schools and clinics, but 
regretted that to date there were no teachers, doctors, or 
nurses to put these buildings to use.
    The World Bank had promised that the success of this 
project would be measured by effective poverty reduction and 
not by the number of barrels of oil exported. Something clearly 
has gone wrong here, and the costs for this are being borne by 
some of Africa's poorest people.
    Beyond Chad and Cameroon, it is important to draw lessons 
from this project, especially in light of the fact that the 
World Bank is embarking on a new high-risk strategy in 
infrastructure. The central lesson is not new. The essence is 
summarized by a Bank commission's expert study known as the 
Extractive Industries Review.
    It recommends a phased approach. Basic human rights 
protections and some level of demonstrated institutional 
capacity to manage revenues, as well as the social and 
environmental impacts, must be in place before launching large-
scale, high-risk investments. The Bank should begin by engaging 
in a transparent public process to define minimum good 
governance criteria and to clearly link decision making on the 
financing of projects and policies to those criteria.
    Thank you.
    [The prepared statement of Dr. Horta follows:]

      Prepared Statement of Dr. Korinna Horta, Senior Economist, 
                 Environmental Defense, Washington, DC

    Mr. Chairman and members of the committee, I thank you for the 
opportunity to contribute to this important process, which we hope will 
result in measures to obtain greater oversight and improvements in the 
development effectiveness of World Bank lending for large-scale 
infrastructure projects.

                     I. THE PROJECT AND ITS CONTENT

    At a cost of $4.2 billion, the Chad-Cameroon Oil & Pipeline project 
is the single largest investment in sub-Saharan Africa today. It 
includes the development of oil fields in southern Chad and the 
construction of a 650-mile-long pipeline through neighboring Cameroon 
to the Atlantic coast. World Bank support for the project was a 
precondition required by an international consortium led by Exxon Mobil 
for building the project.
    The World Bank provided $39.5 million to Chad to finance minority 
holdings TOTCO and COTCO, the companies established by the oil 
consortium in Chad and in Cameroon, and $53.4 million to Cameroon for 
minority holdings in COTCO. In addition, the International Finance 
Corporation (IFC), the World Bank's private sector lending arm, 
provided loans of $100 million each to TOTCO and COTCO and mobilized an 
additional $100 million from other sources, known as B-loans.
    Originally, the World Bank's financing structure for the project 
involved IDA loans for Chad and Cameroon since both countries are not 
considered to be creditworthy enough to qualify for IBRD market lending 
rates. But some donor countries expressed strong concern about using 
funds from the World Bank's lending window for the poorest countries, 
IDA, for the partial assumption of risk for a consortium led by one of 
the world's largest corporations, Exxon Mobil. In order to avoid 
further controversy during IDA replenishment negotiations, the World 
Bank switched its funding to the IBRD enclave loan window, which 
typically includes an off-shore escrow account for debt service.
    In addition to these loans, the World Bank provided two IDA credits 
to Chad for capacity-building projects, the management of the Petroleum 
Economy Project ($17.5 million) and the Petroleum Sector Management 
Capacity-Building Project ($23.7 million). In order to build Cameroon's 
capacity, the World Bank provided an IDA credit for the Cameroon 
Petroleum Environment Capacity Enhancement project ($5.77 million).
    From the outset, the World Bank viewed this project as a model for 
using large-scale infrastructure investments in extractive industries 
for poverty reduction.
    To the consortium, World Bank participation represented an 
insurance policy against political risk in a volatile region, as well 
as a seal of approval of the project, which would draw other financial 
institutions, such as the U.S. Export-Import Bank, into cofinancing the 
project. The World Bank claimed that its innovative partnership with 
the consortium, led by Exxon Mobil, represented a unique opportunity to 
reduce poverty in one of Africa's poorest regions.\1\ This was to be a 
different kind of project, the World Bank asserted, where success would 
be measured `` . . . by poverty reduction rather than by barrels of oil 
produced or millions of dollars received by Chad for oil exports.'' \2\
---------------------------------------------------------------------------
    \1\ The World Bank, ``Chad-Cameroon Petroleum Development and 
Pipeline Project,'' Project Appraisal Document, April 20, 2000, p. 12.
    \2\ Ibid. p. 13.
---------------------------------------------------------------------------
    Oil development in sub-Saharan Africa has a history of ruinous 
corruption, armed conflict, human rights violations, and environmental 
degradation.\3\ Although the situation in Chad differs from that in 
Cameroon, both countries are governed by authoritarian regimes. Both 
countries have been ranked amongst the most corrupt countries in the 
world on Transparency International's corruption perception index. 
Corruption in both countries appears to be at the center of patronage 
systems that maintain the regimes in power.
---------------------------------------------------------------------------
    \3\ See, for example, Ian Gary and Terry Lynn Karl, Bottom of the 
Barrel: Africa's Oil Boom and the Poor, Catholic Relief Services, June 
2003.
---------------------------------------------------------------------------
    Concerning the human rights situation, the State Department's 
annual report on human rights has for many years documented widespread 
abuses and the lack of the ability of citizens in both countries to 
change their government by democratic means.
    In view of this situation, there was widespread concern among 
African and international nongovernmental organizations, some donor 
governments, and voices in the United States Congress regarding the oil 
project's ability to deliver development benefits. Chadian civil 
society organizations, supported by a broad international network, did 
not oppose the oil project per se, but in light of the significant 
risks, called for a moratorium on financing the project until legal 
frameworks to protect human rights and the environment had been put in 
place and the government had shown a commitment to reducing poverty.
    In May 1999, a bipartisan congressional letter addressed to then-
World Bank President James Wolfensohn, and signed by 27 members of 
Congress, requested that the project be postponed until civil and 
political rights were respected in both countries and the political 
will and capacity established to implement environmental protection.
    Yet despite numerous warnings and expressions of concern, the World 
Bank decided to proceed with the project and simultaneously build the 
capacity of both governments in two of the world's most corrupt and 
poorly governed countries. Sadly, one of the key lessons to be drawn 
from this project is that one must first ensure that governance and 
management capacity in countries with weak governance are built up 
before launching large-scale infrastructure/extractive industry 
investments.

 II. THE WORLD BANK'S MISSION OF POVERTY REDUCTION AS REFLECTED IN THE 
                                PROJECT

    Largely in response to public pressure, the World Bank took some 
unprecedented safeguard measures intended to address some of the 
concerns. At the center of these was the passage of a revenue 
management law in Chad intended to ensure transparent use of oil 
revenues for poverty reduction and the establishment of an oversight 
committee to monitor the law's implementation. The law required direct 
oil revenues to be used for poverty reduction (80 percent), to be saved 
for future generations in the post-oil era (10 percent), and to be 
earmarked for the oil-producing region itself (5 percent). Notably, the 
law contained some major loopholes. It covered only the three initial 
oil fields under production by the Exxon Mobil-led consortium and did 
not apply to indirect revenues, such as income taxes on the consortium.
    In addition, the World Bank decided to finance three separate 
capacity-building projects to be carried out in parallel with the oil 
project. These were meant to assist the Chadian Government with 
managing the oil economy and to provide both Chad and Cameroon with the 
capacity to manage the environmental and social impacts of the project. 
When the World Bank approved financing for the project in June 2000, it 
hailed the project as a groundbreaking initiative to translate oil 
wealth into direct benefits for the poor, while mitigating any damage 
to the environment.
    Construction of the project was complete 1 year ahead of schedule 
in October 2003 and Chad, a country slightly larger than three times 
the size of the State of California, with a population of about 9 
million people, became an oil-exporting nation. Today, Chad exports 
roughly 200,000 barrels per day to the world.

    III. THE ADEQUACY OF SAFEGUARDS CONCERNING REVENUE MANAGEMENT, 
                     COMPENSATION, AND ENVIRONMENT

1. Capacity-building
    While the World Bank's role is to ensure compliance with 
safeguards, it is the task of the recipient country governments to 
implement them. In view of the lack of capacity of both the Chadian and 
Cameroonian Governments, the World Bank financed three parallel 
capacity-building projects intended to ensure that Chad's Government 
would be able to manage its new oil economy and that both Chad and 
Cameroon would be able to address the environmental and social impacts 
of a project of this magnitude.
    The International Advisory Group (IAG), a World Bank commissioned 
group of project monitors, soon noted that this was a ``two-speed 
project,'' in which the construction components advanced rapidly while 
government capacity-building lagged behind or failed to get off the 
ground. The IAG warned that the delays would compromise the success of 
the project.\4\ Three years later, as oil was already flowing, the IAG 
concluded that the capacity-building objectives had not been met, 
adding: ``The World Bank must share responsibility with the Government 
for having allowed funds for the capacity-building projects to be used 
for often unproductive studies and for construction projects, with 
serious consequences in terms of Chad's lack of training and 
preparedness.'' \5\
---------------------------------------------------------------------------
    \4\ International Advisory Group, ``Report of December 21, 2001,'' 
(IAG reports are available at www.gic-iag.org).
    \5\ International Advisory Group, ``Report of Visit to Chad and 
Cameroon, May 17-June 5, 2004,'' July 2004.
---------------------------------------------------------------------------
    To date, no significant progress has been made. According to the 
IAG's most recent report on Cameroon, CAPECE, the capacity-building 
project for the Cameroonian Government, continues to be far from 
reaching its target objectives.\6\
---------------------------------------------------------------------------
    \6\ International Advisory Group, Report of Mission 11 to Cameroon, 
March 15-23, 2006, p. 18.
---------------------------------------------------------------------------
    The poor results of capacity-building efforts for oil revenue 
management have not advanced the World Bank's poverty reduction goals. 
Since construction on the project began in 2000, Chad has slipped on 
the United Nations Development Program's Human Development Index from 
No. 167 to No. 173 (in 2005) and average life expectancy has been 
further reduced from 44.7 years to 43.6 years. While it may be 
debatable whether this decline might have occurred with or without the 
project, the point is that the project was supposed to significantly 
benefit the poorest people of Chad and so far it has clearly failed.
    Furthermore, a succession of reports by the International Advisory 
Group have documented that the lack of capacity to address the 
environment and social consequences of the project has had serious 
detrimental impacts on the affected populations in the oil-producing 
region in Chad and on many communities along the pipeline route in 
Cameroon.\7\
---------------------------------------------------------------------------
    \7\ Reports of the International Advisory Group can be found at 
www.gic-iag.com.
---------------------------------------------------------------------------
2. Revenue management
    Chad. Things got off to an embarrassing start when it became public 
in January 2001 that Chad had used part of its $25 million signature 
bonus from the oil consortium for weapons purchases. The lack of 
transparency in the use of the funds violated the spirit, if not the 
letter, of the agreement with the bank to use oil revenues 
transparently for poverty reduction. This early transgression 
foreshadowed the more serious crisis in the revenue management system 
that has unfolded in recent months.
    From the inception of the project, the Chadian Government has shown 
little good faith in implementing the revenue management law and has 
created considerable hurdles for the functioning of the oversight 
committee.\8\ It is largely due to constant prodding, including from 
the U.S. Treasury Department, as well as to the integrity of the 
oversight committee, that some steps toward greater transparency have 
been taken. By the end of 2005, $245 million on oil revenues had been 
allocated to priority sectors such as health and education, but the 
government has limited absorptive capacity and little capacity to 
develop projects. At the same time, the oversight committee's reports 
have documented problems with government spending of the oil revenues, 
including irregularities in the transfer of funds, overpricing of goods 
and services, etc. The situation had become so critical that the World 
Bank told the Financial Times in August 2005 that it had serious 
concerns about how the Chadian Government was using the oil 
revenues.\9\ But the oversight committee has limited resources, lacks 
independent financing, and has no power to ensure compliance with the 
revenue management law. Its role is limited to issuing reports without 
means or authority to monitor the effectiveness of corrective measures 
taken in response to its findings. Furthermore, committee members have 
expressed their frustration about lack of access to information from 
both Exxon Mobil and the Chadian Government.\10\
---------------------------------------------------------------------------
    \8\ For a detailed analysis of oil revenue management issues in 
Chad, see Ian Gary and Nikki Reisch, Chad's Oil: Miracle or Mirage? 
Following the Money in Africa's Newest Petro-State, Bank Information 
Center and Catholic Relief Services, February 2005.
    \9\ Dino Mahtani, ``World Bank Concern Over Chad Oil Revenues,'' 
Financial Times, August 20, 2005.
    \10\ BBC News (online), ``Chad's Oil Watchdog `Powerless','' May 
24, 2004.
---------------------------------------------------------------------------
    In January 2006, after several months of often public disputes 
between Chad and the World Bank, Chad's President Deby ratified 
significant amendments to the revenue management law that gutted the 
law's original intent. Claiming budgetary constraints and a worsening 
security situation, the new amendments added military expenditures to 
the definition of priority sectors for development, increased the share 
of oil revenues for discretionary government spending, and abolished 
the Future Generations Account.
    In light of this flagrant violation of its loan agreements, the 
World Bank suspended $124 million in planned loan disbursements to 
Chad, which in turn triggered the freezing of the London-based escrow 
account into which oil revenues were being deposited by the oil 
consortium. The freeze did not cover Chad's ``Future Generations 
Account'' and the government took possession of the $36 million that 
had accumulated for use in the post-oil economy.
    Faced with an armed rebellion by his own ethnic group, including 
family members upset about his determination not to yield power,\11\ 
Chad's President Deby threatened to cut off the oil pipeline at the end 
of April 2006. Just before this deadline, the World Bank announced an 
``interim agreement'' with Chad and the resumption of some loan 
disbursements to Chad. In the process, the World Bank provided 
President Deby with political support just prior to the presidential 
elections of May 3, 2006. These elections were by then already known to 
be so fraudulent that they would be boycotted by the opposition and 
ignored by international election observers.
---------------------------------------------------------------------------
    \11\ President Deby orchestrated a referendum to change Chad's 
constitution to end presidential term limits in June 2005, frustrating 
those who had hoped to succeed him after the end of his term in 2006.
---------------------------------------------------------------------------
    Under the interim agreement, Chad passed a supplementary budget for 
2006, which directs 70 percent of revenues to the original poverty 
reduction sectors, while maintaining the amendments that led to the 
suspension of loan disbursements and freezing of the escrow account in 
the first place. The World Bank has agreed to gradually release the 
blocked revenues over the next 3 months while negotiations are underway 
to devise a new revenue management law. A new agreement between Chad 
and the World Bank is expected by September 26, 2006.
    Cameroon. Describing Cameroon's challenges in reducing poverty, the 
World Bank's most recent country assistance strategy for Cameroon 
reiterates findings from previous reports ``. . . accountability and 
transparency in the use of public resources are insufficient, with 
scarce public resources poorly targeted to priority sectors; . . .'' 
\12\
---------------------------------------------------------------------------
    \12\ The World Bank, Country Assistance Strategy for the Republic 
of Cameroon, August 14, 2003, p. 7
---------------------------------------------------------------------------
    Despite these long-standing problems, a system to manage pipeline 
transit fees--about $50 million a year--was not established. Despite 
Cameroon's top ranking on the list published by Transparency 
International, the World Bank simply assumed that the Government of 
Cameroon would use the royalties--which are substantially less than 
those earned by Chad and represent a much smaller fraction of the 
national budget--to improve living conditions for its people. Why the 
World Bank would have made this assumption is unclear, since its own 
Operations Evaluations Department has documented the government's lack 
of commitment to poverty reduction.\13\
---------------------------------------------------------------------------
    \13\ The World Bank, Operations Evaluation Department: Review of 
Republic of Cameroon 1996 CAS Completion Report, September 3, 2003.
---------------------------------------------------------------------------
3. Compensation, social development, and public health
    Interview with the Bishop of Doba. Bishop Michel Busso of Doba, the 
main town in Chad's oil-producing region, said in a recent interview 
that oil money is suffocating the region's development and that local 
communities are profoundly disappointed by the oil project.\14\ 
Prostitution, alcoholism, and environmental destruction have become 
widespread. Plenty of money appeared to have come into the region but 
local communities have not seen benefits. As an example, Bishop Busso 
cited the small village of Kom, located near Exxon Mobil's 21st century 
state-of-the-art local headquarters, which continues to wait for the 
construction of a well. Bishop Busso was glad to see that some schools 
and clinics had been built, but added that he still was waiting for 
them to be put to use since there are no teachers and doctors.
---------------------------------------------------------------------------
    \14\ Interview with Monsignore Michel Busso, Bishop of Doba, Chad, 
conducted by Martin Zint, coordinator of the German Church-based NGO 
network Erdoel AG, Aix la Chapelle, France, June 27, 2006.
---------------------------------------------------------------------------
    Unsustainable loss of land in the oil-producing region. According 
to the IAG, local communities in Chad have lost more land and for 
longer periods of time than had been anticipated in the project's 
Environmental Management Plan.\15\ Furthermore, restoring and returning 
land to the poor subsistence farming communities is often delayed by 
several years.
---------------------------------------------------------------------------
    \15\ International Advisory Group, Report of Mission 10 to Chad and 
Cameroon, September 25 to October 18, 2005, published on November 25, 
2005, p. 7 (available at www.gic-iag.org).
---------------------------------------------------------------------------
    The loss of agricultural land is getting worse with the expansion 
of the oil project from the less populated area surrounding the Doba 
oil fields to the much more densely populated area around the new oil 
fields in Nya-Moundouli. The IAA is now questioning the viability of 
the region's agricultural systems given the loss of land, and has 
expressed concern about the adequacy of compensation payments for the 
loss of local livelihoods.\16\
---------------------------------------------------------------------------
    \16\ Ibid. p. 12.
---------------------------------------------------------------------------
    Lack of Legal Recourse. In view of the general atmosphere of 
repression and absence of legal recourse, affected communities have few 
possibilities to obtain redress for their grievances. In cases where 
monetary compensation has been paid to individual households, local 
authorities supported by the military reportedly extort part of the 
compensation received by poor farmers, who have no justice system to 
which they can turn. Villagers who offer resistance have been beaten, 
and human rights workers who defend local villagers have received death 
threats and have been arrested. \17\ For example, Nekarmbaye Gedeon, 
who heads a local section of the Chadian Association for Non-Violence 
in Krim Krim in the region of Logone Occidental, and four of his 
colleagues were arrested in March 2004 on order of the local police 
chief. After his release, he told an interviewer that his life was only 
saved because of an international campaign on his behalf.\18\
---------------------------------------------------------------------------
    \17\ See, for example, the letter of July 24, 2005, from Erdoel AG, 
the German NGO working group including Germany's major Church-based 
organizations, to the World Bank, www.erdoel-tschad.de.
    \18\ Nekarmbaye Gedeon, interview with K. Horta, N'Djamena, Chad, 
10 October 2005. Mapideh Kagmbayae, president of the Association of 
Human Rights (ADH), a human rights organization, has also received 
death threats.
---------------------------------------------------------------------------
    Another serious problem faced by affected people is the lack of 
accountability of the mostly foreign companies subcontracted by the 
Exxon Mobil-led consortium and their national companies TOTCO and 
COTCO. Once foreign firms have completed their tasks and leave the 
country, affected people have nowhere left to turn. One example is the 
case of about 70 workers who joined the claim submitted to the World 
Bank's inspection panel by the Center for Environment and Development 
in Cameroon. The workers had suffered occupational injury and as a 
result simply lost their jobs and received no assistance with medical 
expenses. In response to the claim, the inspection panel stated that it 
could not address the question of workers' rights since there is no 
World Bank policy related to the question.\19\
---------------------------------------------------------------------------
    \19\ The World Bank, Inspection Panel Investigation Report, 
Cameroon: Petroleum Development and Pipeline Project and Petroleum 
Environment Capacity Enhancement Project, May 2003.
---------------------------------------------------------------------------
    Nkoltara, a Cameroonian village along the pipeline route. In 
October 2005, I visited several villages along the central section of 
the pipeline route together with colleagues from the Center for 
Environment and Development in Yaounde. As an example, I would like to 
refer to the village of Nkoltara, a mere 15 miles north of the capital 
of Yaounde, where pipeline construction has had a devastating impact on 
the villagers.
    The only source of water in the village is a small water hole 
adjacent to signs indicating the site where the pipeline is buried. The 
water seemed to be covered by a milky film of grease. Yet this is where 
ill-nourished children clothed in tattered rags were lining up with 
buckets of different sizes to fetch their families' water supplies 
(please see attached pictures). According to the villagers, skin 
rashes, gastrointestinal disorders, and other previously unknown 
ailments are now widespread in the community. When the villagers 
protested and demanded a new water source, the police came into the 
village, had everyone gather, strip, and get beaten.
    Families with older children sent them to fetch water at a source a 
few miles away to have cleaner water. But carrying water over long 
distances is not compatible with attending school, which is also 
several miles away. One woman told me, on camera, that before pipeline 
construction, she was making enough money from raising chickens to 
afford to rent a room for her school-age children in the nearest town 
so that they could attend school. She was, however, unfortunate, in 
that some of the most intensive construction noise occurred in front of 
her house. As a result of that, the young chicks all died and she 
received no compensation to replace them. Now there is no money to rent 
a room for her children and since the distance to walk to school and 
back every day is just too long, the children are deprived of even a 
basic education.
    Cameroonian NGOs have documented an extensive pattern of inadequate 
compensation and intimidation along the pipeline route and near its 
Atlantic Ocean terminal.\20\ Some of the outstanding cases are now 
slowly getting resolved as a result of very competent local NGO 
research and advocacy efforts. Yet to date only a small percentage of 
claims has been processed and the IAG warns of a large backlog from 
year to year.\21\
---------------------------------------------------------------------------
    \20\ See, for example, Center for Environment and Development/
Relufa, Rapport sur les cas litigieux de compensation au longue du 
pipeline, Yaounde, 2004.
    \21\ International Advisory Group, Report of Mission 11 to 
Cameroon, March 15-23, 2006, p. 2.
---------------------------------------------------------------------------
    Public health. It is well-known that transportation corridors in 
sub-Saharan Africa are a predominant route for the spread of HIV/AIDS 
on the continent. As noted by the Environmental Panel of Experts, which 
was established as a requirement of the World Bank's environmental 
assessment process, the construction of the Chad-Cameroon oil pipeline 
represented an ideal pattern for the transmission of HIV/AIDS along the 
pipeline route and in the oil fields in southern Chad.\22\ The panel 
was especially concerned about the extremely extensive long-distance 
truck traffic between the port city of Douala and the oil fields in 
southern Chad. Accordingly, the panel ranked measures to minimize 
infection rates and treatment of HIV infections as the top priority for 
health management and called for extraordinary measures to be put in 
place to prevent a potentially catastrophic situation.
---------------------------------------------------------------------------
    \22\ Jobin, William, Health and Equity Impacts of a Large Oil 
Project in Africa, in: Bulletin of the World Health Organization, 2003, 
81 (G).
---------------------------------------------------------------------------
    Yet problems of HIV/AIDS and other communicable diseases are not 
adequately being monitored, let alone addressed. In an article 
published in the Bulletin of the World Health Organization, a public 
health expert working on the project, William Jobin, expressed dismay 
at the failures. Jobin stated, ``It appeared that in the project, 
decisions were largely based on cost and profit considerations, giving 
only passing attention to environmental and social aspects, and little 
or no decision-making power to the affected populations.'' \23\
---------------------------------------------------------------------------
    \23\ Ibid. p. 6.
---------------------------------------------------------------------------
4. Environment
    Lack of adequate environmental assessment. The World Bank's 
Inspection Panel carried out two separate investigations into possible 
violations of World Bank safeguard policies, one in Chad and a second 
one in Cameroon. In both cases, the inspection panel concluded that the 
World Bank had violated its operational policy on environmental 
assessment because the scope and magnitude of the project would have 
required undertaking cumulative, regional environmental assessments 
which were not done. In both countries, the panel also concluded that 
there was a lack of adequate baseline studies and a missing link 
between the existing environmental studies and subsequent mitigation 
plans.\24\
---------------------------------------------------------------------------
    \24\ The World Bank Inspection Panel, Inspection Panel 
Investigation Report (INSP/R2002-2003, July 23, 2003, and Inspection 
Panel Investigations Report, Report No. 25734, May 2003.
---------------------------------------------------------------------------
    In Chad, among the problems affecting the oil-producing region are 
severe dust pollution with impacts on human health and crop fertility. 
The International Advisory Group also calls for the need to pay special 
attention to water and waste treatment as well as air pollution.\25\
---------------------------------------------------------------------------
    \25\ International Advisory Group, Work Plan, Update, June 26, 
2006.
---------------------------------------------------------------------------
    In Cameroon, the pollution of local water sources along the 
pipeline route and the loss of local fisheries at the pipeline's marine 
terminal are amongst the problems cutting into the already precarious 
livelihoods of local communities.
    Indigenous peoples. Neither Chad nor Cameroon recognizes the rights 
of indigenous peoples and neither has recognized the existence of 
indigenous peoples in their national territories.\26\ This is of 
special concern given the serious and possibly irreversible problems 
faced by the indigenous and seminomadic Bagyeli pygmy people in 
Cameroon's coastal rain forest which the pipeline traverses.
---------------------------------------------------------------------------
    \26\ The Chadian, and Cameroonian Governments have not signed 
international conventions concerning indigenous and tribal peoples such 
as the Convention No. 169 of the International Labor Organization, 
which entered into force in 1991.
---------------------------------------------------------------------------
    The World Bank's policy on indigenous peoples (Operational 
Directive 4.20), which was in effect at the time of loan preparation, 
and until 2005 included provisions for World Bank assistance to 
borrowing governments whose laws were structurally weak concerning the 
recognition of the legal rights of local communities. But the World 
Bank did not assess the weaknesses of Cameroon's legal system in 
protecting the rights of indigenous peoples and no strengthening of the 
system took place.
    The Indigenous Peoples' Plan prepared as a mandatory requirement of 
OD 4.20 was built on the assumption that there would be a long-term 
commitment by the Government of Cameroon to protect the indigenous 
communities affected by the project.
    There has been no evidence of any such commitment to date. 
Furthermore, the Bagyeli were largely excluded from the preparation of 
the Indigenous Peoples Plan. As a result, the plan has a fundamental 
flaw: It does not address the need of land security for the Bagyeli, 
although land is critical to their survival as a group.
    A Cameroonian foundation, FEDEC, was established with a trust fund 
of $3 million from the oil consortium to finance both implementation of 
the Indigenous Peoples' Plan and the management of two national parks 
over the life of the project estimated at 28 years. The national parks 
of Campo Ma'an and Mbem-Djerem were created to offset biodiversity 
losses as a result of the pipeline. FEDEC's work, however, has been 
marred by internal conflict and continues to be largely ineffectual. 
According to the IAG's most recent report on Cameroon, FEDEC continues 
to lack strategic objectives and proper financial planning.\27\
---------------------------------------------------------------------------
    \27\ International Advisory Group, Report of Mission 11 to 
Cameroon, March 15-23, 2006, p. 4.
---------------------------------------------------------------------------
    Expansion of oil exploration in Chad. According to the loan 
agreements between the World Bank and Chad and Cameroon, all future oil 
exports using the pipeline will have to comply with the principles of 
the Environmental Management Plan developed for the initial three oil 
fields cofinanced by World Bank loans. So far there is no evidence that 
this requirement is being met. Exxon Mobil began pumping oil from new 
satellite fields in 2005. In addition, the consortium is conducting 
seismic testing beyond the Doba area in the East Doeso basin of the 
Sahr area of southern Chad. It also has requested a concession in the 
Maikeri area of the Logone region, while the Canadian Encana/Cliveden 
joint venture is continuing to explore and drill test wells in the 
Bongor area, the Lake Chad basin.
    Cameroon's planned Lom Pangar dam. Incredibly, the Government of 
Cameroon is now seeking to build a dam whose reservoir would submerge 
part of the World Bank-financed pipeline and flood a biodiversity-rich 
forest that was put under protection to offset biodiversity losses as a 
result of pipeline construction. The government plans to construct the 
Lom Pangar dam on the Sanaga river in eastern Cameroon in order to 
increase energy supply to the country's existing electricity grid and 
the largest energy consumer, the Alucam Aluminum smelter. The World 
Bank has expressed concern over plans to build this dam especially 
because the reservoir created by the dam would submerge a section of 
the pipeline, which was not built to withstand such pressure, and it 
would flood a portion of the Deng Deng forest, a biodiversity hotspot 
which has been put under protection to compensate for losses of 
biodiversity as a result of the oil pipeline construction. The pipeline 
was rerouted to avoid going through the central Deng Deng forest area. 
The World Bank and the Government of Cameroon have an obligation to 
ensure not only pipeline safety but also to uphold the protection of 
the Deng Deng.

 IV. THE NEED FOR IMPROVED REVENUE DESIGN TO MAXIMIZE BENEFITS FOR THE 
 PEOPLE OF CHAD AND CAMEROON AND MITIGATION MEASURES FOR THE AFFECTED 
                         PEOPLE AND ENVIRONMENT

Revenue management
    Cameroon. Unlike in Chad, the World Bank did not insist on special 
provisions to ensure that royalties from pipeline operation are 
earmarked for poverty reduction. However, the World Bank should require 
the establishment of a transparent revenue system to ensure that 
royalties are used for the mitigation of negative impacts on affected 
communities and the environment before remaining royalties enter the 
stream of overall government revenues.
    Chad. The World Bank currently is negotiating a new framework 
revenue management law with Chad and an agreement is scheduled to be 
completed by the end of September 2006. The opportunity should be 
seized to improve upon the original law imposed on Chad by ensuring 
that earnings from all oil operations in Chad (including new oil 
developments which are already underway, as well as the substantial 
indirect revenues, such as customs duties and taxes) from the oil 
sector are covered by the transparency and revenue management 
requirements aimed at promoting poverty reduction. It is vital that 
systems are put in place to ensure proper use for indirect revenues, 
since they will soon outweigh income from royalties on oil production. 
In 2007, it is estimated that Chad will earn $1.5 billion in indirect 
revenues from the oil consortium, amounting to a near tripling of the 
country's national budget. In addition, the new framework should 
strengthen the role of the oversight committee and ensure that it has 
the necessary resources and information to carry out its tasks. 
Finally, the government should disclose the contractual agreements with 
oil companies investing in the country.
    Public health. As a matter of urgency, the World Bank should carry 
out a long-overdue assessment of HIV/AIDS and other communicable 
diseases along the pipeline route and in the oil fields. This is 
critical to ensure that urgent remedial actions are undertaken to 
impede the further spread of the disease throughout both Chad and 
Cameroon and to provide effective treatment to those already infected. 
The now largely demobilized workforce and the movement of work camp 
followers call for additional measures to track and address the spread 
of the disease to regions where these people may have returned or 
migrated after conclusion of the major public works components of the 
project.
    Unresolved social and environmental problems. The World Bank needs 
to appoint core staff responsible for solving the numerous unresolved 
environmental and social issues, including the plight of the indigenous 
Bagyeli people. Frequent staff turnover at the bank has contributed to 
the difficulties in getting things done on the ground.
    New oil exploration. There is no evidence to date that there is 
compliance with the requirement that all new oil development respect 
the social and environmental standards of the Environmental Management 
Plan despite increased exploration and the development of new oil 
fields. The World Bank has to hold the government and oil companies 
accountable for commitments made.
    National dialog in Chad. Authoritarian regimes and oil wells are a 
combustible mix. Violent conflict continues to threaten Chad as armed 
uprisings occur in several regions, including near the country's 
borders with Sudan and with the Central African Republic. It is urgent 
to reduce any further potential for conflict which otherwise might yet 
engulf the entire region.
    A broad coalition of Chadian civil society organizations, including 
the churches, has launched an initiative for a peace and reconciliation 
dialog as an alternative to the specter of increasing violence. Such a 
national dialog has to bring the government, rebel groups, and other 
interested parties to the same table in order to prepare genuine 
democratic reforms. According to long-term observers of Chad, it is 
fair to say that the initiative has wide support among the Chadian 
population, which does not wish to see a dictator replaced by another 
war lord.
    Such a national dialog needs to be mediated and supported by the 
international community, including the World Bank.

V. LESSONS TO BE DRAWN FOR WORLD BANK SUPPORT FOR EXTRACTIVE INDUSTRIES

    The World Bank had claimed that the Chad-Cameroon Project 
represents a new approach for investments in extractive industries, not 
only because of its initiatives with regard to revenue management, but 
also because its involvement helps ensure that the project is 
implemented in an environmentally and socially responsible manner.\28\
---------------------------------------------------------------------------
    \28\ World Bank press release, Oct. 10, 2003.
---------------------------------------------------------------------------
    The World Bank can claim good intentions. But the long record of 
extractive industries in countries with weak governance where local 
communities have been impoverished, the environment destroyed, and the 
revenues disappeared should have led to a better analysis of the risks 
involved. In addition to continued efforts to correct what has gone 
wrong, it is also critical to draw lessons from the Chad-Cameroon 
project for investments in extractive industries more broadly.
    Unfortunately, the lessons are not new. They were clearly 
articulated by the World Bank commissioned Extractive Industries Review 
(EIR), a 3-year, independent evaluation of the impact of World Bank 
Group support for oil, gas, and mineral development which was completed 
in 2003.
    The final EIR report concluded that where basic conditions of good 
governance are absent, extractive industries have neither a record nor 
hope of contributing to poverty reduction.\29\
---------------------------------------------------------------------------
    \29\ Public reaction against the negative social, environmental, 
and economic impacts associated with many EI projects prompted the bank 
to reexamine its role in these sectors. In 2001, pressure from civil 
society finally led the bank's management to initiate the EIR, a multi-
stakeholder process that sought to assess the bank's involvement in EI 
to date, and determine the appropriate level of involvement in the 
future. The central question posed by the review was whether bank 
supported EI investments can produce dividends that benefit the poor, 
while managing, minimizing, and justifying their social and 
environmental risks.
---------------------------------------------------------------------------
    One of the report's central recommendations to the World Bank Group 
is the adoption of a phased approach: Basic human rights protections 
and some level of demonstrated institutional capacity to manage 
revenues as well as the environmental and social impacts must be in 
place before launching large-scale extractive industry investments.
    Similarly, the World Bank's own Operations Evaluations Department 
(OED) identified in 2003 that the quality of governance as the key 
factor in determining project success ``. . . good governance is the 
prerequisite for enhancing the positive linkage between increased 
fiscal revenue flows and sustainable development.'' \30\ (Emphasis 
added.)
---------------------------------------------------------------------------
    \30\ Operations Evaluation Department, ``Extractive Industries and 
Sustainable Development--An Evaluation of World Bank Group 
Experience,'' Washington, DC, 2003, 7.
---------------------------------------------------------------------------
    In its evaluation of the role of governance in activities related 
to extractive industries, OED concluded that: ``Without the rule of 
law, the government is unable to implement legal, regulatory, and 
policy solutions that would allow it to control the costs and risks. 
There does not seem to be much of an argument in favor of developing or 
expanding the EI sectors in such environments.'' \31\ The OED adds: ``. 
. . no current bank analytic product allows an evaluation of the rule 
of law . . .'' \32\
---------------------------------------------------------------------------
    \31\ Operations Evaluation Department, ``Evaluation of the World 
Bank Group's Activities in the Extractive Industries--Factoring in 
Governance,'' Washington, DC, September 1, 2004, 7.
    \32\ Ibid. 23.
---------------------------------------------------------------------------
    In response to the EIR and OED recommendations, the World Bank 
Group must begin by engaging in a transparent, public process to define 
minimum good governance criteria and to clearly link decision-making 
around project and policy support to those criteria. In the absence of 
basic governance conditions, respect for human rights and functioning 
mechanisms for citizens to hold their government accountable, projects 
which aim to increase revenues to the state while creating 
environmental, social, and political risks have little hope of 
contributing to poverty reduction.
    Linking monitoring with accountability. The experience of the Chad-
Cameroon project also highlights the need to ensure that independent 
monitoring mechanisms, such as the International Advisory Group (IAG), 
have the authority and means to ensure adequate follow-up to their 
recommendations. While the IAG has served as an important critical 
observer of the project's implementation, the fact that it has repeated 
many of the same recommendations in its reports over the years 
indicates that they have resulted in little concrete action. The design 
of future monitoring mechanisms should be informed by lessons from this 
project and establish a link between monitoring and mechanisms for 
accountability to ensure that findings are adequately addressed.






    The Chairman. Thank you very much, Dr. Horta.
    I would like to call now upon Mr. Bapna for his testimony.

STATEMENT OF MANISH BAPNA, EXECUTIVE DIRECTOR, BANK INFORMATION 
                     CENTER, WASHINGTON, DC

    Mr. Bapna. Good morning. I would like to join others in 
thanking you, Mr. Chairman, for the leadership you and your 
staff have demonstrated in helping fight corruption and improve 
development effectiveness at the multilateral development 
banks.
    I speak as someone familiar with infrastructure from both 
sides of the street. I was a task manager and economist at the 
World Bank for many years, working on infrastructure, and I am 
now the executive director of the Bank Information Center. BIC 
has monitored infrastructure projects financed by these 
development banks for almost 20 years.
    I would like to start by sharing a few simple facts about 
infrastructure that have helped shape some recommendations that 
I will offer. First, improving access to basic infrastructure 
services is essential to reducing poverty. Over 2.7 billion 
people live on less than $2 a day, 1.6 billion lack access to 
electricity, and 1.1 billion lack access to clean water. The 
issue before us is not if infrastructure is important, but what 
type of infrastructure is critical, for whom is the 
infrastructure intended, and how should decisions on 
infrastructure priorities and projects be reached?
    The term ``infrastructure'' encompasses a wide array of 
investments that have varying impacts on improving household 
incomes and reducing poverty. Some infrastructure promotes 
economic growth, while others focus on increasing access for 
the poor. Infrastructure can be a single large project or 
hundreds of small village-based projects. Project design and 
implementation can be centralized or decentralized. 
Infrastructure can be high-risk or low-risk in nature. It can 
be for domestic use or it can be for exports. And it is more 
than just bricks and mortar investments. Infrastructure 
services can also be provided through policy and institutional 
reforms.
    Within this I would like to draw a particular distinction 
between capital-intensive, export-oriented projects such as oil 
and gas pipelines and infrastructure projects that are built to 
provide basic services to a variety of domestic users. There is 
a compelling, decades-long record of the failures of many 
large, high-risk infrastructure projects to reduce poverty on 
the ground.
    Public controversy has historically centered on large, 
high-risk, export-oriented infrastructure developments, 
particularly in the energy sector. We have heard today from 
experts on Chad-Cameroon and Camisea. I argue that these are 
not the exceptions but more the rule. I provide a list of 10 
such large, high-risk, controversial projects with questionable 
impacts on poverty that have been recently financed by 
multilateral development banks in my written testimony.
    A fourth fact is that politics, not poverty, often drives 
the current push for large, high-risk infrastructure. The 
fundamental problem is a lack of political will. How do we 
generate the will to strike the right balance between different 
types of and approaches to infrastructure, to implement the 
lessons learned from earlier infrastructure mistakes, and to 
act upon recommendations articulated in previous committee 
hearings on the multilateral development banks?
    Conceptually, what is needed to improve the role of 
infrastructure in reducing poverty is a radical shift in the 
portfolio from high-risk, export-oriented infrastructure to 
pro-poor, decentralized, smart infrastructure. And I define 
smart infrastructure as providing more direct and immediate 
benefits to the poor; as helping ensure a more prominent role 
of users in all stages of the project cycle, infrastructure 
that is more amenable to transparency and accountability and 
less susceptible to large-scale corruption, although close 
scrutiny will still be required. It is able to generate more 
local employment, sustained employment, and technical capacity 
more easily. And typically it is smaller in size and scale, and 
at times even lower in cost. Sometimes small is indeed 
beautiful.
    The radical shift to smart infrastructure is not to suggest 
that large infrastructure is unnecessary to reducing poverty. 
Certain types of large infrastructure remain vitally important, 
and the development banks should invest in this area, but they 
must do so responsibly. My written testimony includes a more 
expanded treatment of recommendations, but I would like to 
highlight a few that would help encourage the shift to smart 
infrastructure and help ensure that large infrastructure 
actually delivers positive development outcomes.
    First, explicit sector/subsector lending targets to promote 
pro-poor, smart infrastructure should be established. The World 
Bank has stated that it aims to increase overall infrastructure 
lending to $10 billion a year or 40 percent of its overall 
portfolio by 2008. What would be useful is if these lending 
targets were further disaggregated to indicate what percentage 
of their infrastructure investments would be allocated to pro-
poor smart infrastructure versus other capital-intensive or 
export-oriented projects. The use of lending targets may be a 
blunt tool, but it has proven to be particularly effective in 
encouraging shifts in the portfolios of development banks.
    Second, a comprehensive and participatory options 
assessment should be conducted before a decision is made to 
proceed with any large infrastructure program or project. The 
main reason large infrastructure fails to deliver benefits to 
the poor is because the wrong project was originally selected 
and financed.
    The problem lies in the process. Projects are identified 
without adequately assessing the full range of policy, 
institutional and technical options that are relevant to 
addressing the identified need. Participatory and transparent 
options assessments, when conducted properly, are an effective 
way to reduce this risk.
    Third, MDBs should develop sector-specific anticorruption 
guidelines for infrastructure. On the one hand, MDBs are 
ramping up investment in infrastructure. On the other hand, 
they are attempting to fight corruption, and we know that 
infrastructure is particularly prone to corruption.
    We also know that multilateral development banks lent $20 
billion in infrastructure in 2005. If we conservatively assume 
that 15 to 20 percent of this lending was lost through 
corruption, we're talking about $3 to $4 billion lost to 
corruption from infrastructure investments. The rationale for 
formulating sector-specific anticorruption measures to resolve 
this therefore becomes readily apparent.
    The World Bank is in the process of developing an 
anticorruption in governance framework to help guide its future 
operations. As part of these efforts, the Bank should develop 
more specific anticorruption guidelines for those sectors 
especially prone to corruption.
    And, last, a small, truly independent evaluation unit to 
measure the poverty impacts of infrastructure lending should be 
set up. This recommendation follows the unambiguous conclusion 
reached in the previous committee hearing on the need for real 
independence and objectivity in the evaluation process. A pilot 
initiative could be designed to evaluate a sample of 
infrastructure projects approved by development banks over a 3-
year period, the results of which can provide concrete 
guidelines on how to improve the poverty impacts of 
infrastructure and how to put in place more effective 
monitoring and evaluation systems to measure the results of 
future infrastructure investments.
    I would like to conclude by saying that the committee has 
been particularly successful in elevating the issue of 
corruption on the development agenda, and it is our hope that 
it will be equally successful in catalyzing serious reflection 
and reform in the infrastructure lending practices and policies 
of the multilateral development banks. I thank you for your 
time and attention.
    [The prepared statement of Mr. Bapna follows:]

     Prepared Statement of Manish Bapna, Executive Director, Bank 
                   Information Center, Washington, DC

    It is an honor to be invited to share my views on the role that 
infrastructure can play to reduce poverty and improve development 
outcomes in MDB-financed operations. I would like to thank you, Mr. 
Chairman, and members of the committee, for the leadership you and your 
staff have demonstrated in advancing dialog on the important role of 
multilateral development banks (MDBs) in international development and 
the challenges that these global institutions face in fulfilling their 
missions to alleviate poverty.
    I am testifying today on behalf of a number of U.S.-based 
nongovernmental organizations: Bank Information Center, Environmental 
Defense, and International Rivers Network. I am the executive director 
of the Bank Information Center (BIC). BIC partners with civil society 
in developing and transition countries to influence the World Bank and 
other international financial institutions (IFIs) to promote social and 
economic justice and ecological sustainability. BIC is an independent, 
nonprofit, nongovernmental organization that advocates for the 
protection of rights, participation, transparency, and public 
accountability in the governance and operations of the World Bank, 
regional development banks, and IMF.

                                CONTEXT

    Improving access to basic infrastructure services is essential to 
reducing poverty. Basic infrastructure is critical to reducing poverty 
and achieving the Millennium Development Goals. Over 2.7 billion people 
live on less than $2 a day, 1.6 billion lack access to electricity, and 
1.1 billion lack access to clean water. ``Examples of Smart 
Infrastructure Projects Financed by MDBs'' provides some indicators on 
access to basic infrastructure services (see Additional Materials 
section at end of hearing). The issue before us is not whether 
infrastructure is important but what type of infrastructure is 
critical; for whom the infrastructure is intended; and how should 
decisions on infrastructure priorities and projects be reached?
    A concise definition for infrastructure is all the facilities used 
to deliver energy and minerals, water and sanitation, telecommunication 
and transport services. However, this simple definition masks a wide 
array of investments that have varying impacts on improving household 
incomes and reducing poverty. To help understand this diversity, 
infrastructure investments can be unbundled along a number of different 
criteria. Some investments focus on promoting economic growth while 
others target enhanced access by the poor. Infrastructure can be a 
single large project or hundreds of small projects; project design and 
implementation can be centralized or decentralized. Infrastructure can 
be high risk or low risk in nature. Infrastructure can provide products 
or services for domestic use or for exports through an enclave 
arrangement. Also important, infrastructure services refer to more than 
just bricks-and-mortar investments. Infrastructure services can also be 
provided through policy and institutional reforms such as creating an 
enabling environment to transfer irrigation management from the state 
to village-level water user organizations or instituting demand-side 
management regulations for energy consumption.
    An important distinction needs to be drawn between capital-
intensive, commodity export projects that require large transport 
systems to evacuate their product (such as oil and gas pipelines), and 
infrastructure projects that are built to provide basic services to a 
variety of users. While both are labeled ``infrastructure,'' the 
central difference is that in the case of the former, the primary 
``development'' benefits to the host country are almost entirely in the 
form of revenues to the government, while in the latter, the benefits 
may come in a variety of forms, including improved public access to 
transportation systems, electrification, water and sanitation services, 
increased industrial capacity for a variety of domestic sectors, as 
well as revenues to the state. The need for and potential benefits of 
the latter are evident in developing countries (see table 1). The case 
for the former, however, is much more debatable, as the impact of 
increased revenue generation on growth and poverty reduction depends 
upon the will and capacity of a government to use revenues effectively 
for the benefit of its people.

                                    Table 1: Basic Infrastructure Indicators
----------------------------------------------------------------------------------------------------------------
                             Region                                 AFR     EAP     ECA     LCR     MNA     SAR
----------------------------------------------------------------------------------------------------------------
Population (millions)...........................................     674   1,823     474     518     300   1,378
    % living on less than $1 a day..............................      46      15       4      10       2      31
    % urban population..........................................      36      43      65      77      59      28
Major Access Indicators
    Electricity (% of population with access to network)........      24      88      99      89      92      43
    Water (% of population with access to improved sources).....      58      78      91      89      88      84
    Sanitation (% of population with access to improved               36      49      82      74      75      35
     sanitation)................................................
    Roads (% of rural pop. living within 2 kms of an all-season       34      95      77      54      51      65
     road)......................................................
----------------------------------------------------------------------------------------------------------------
Sources: World Bank (2006), WDI (2001, 2002, 2003); International Energy Agency (2002, 2004).

    Infrastructure is by far the largest sector financed by the MDBs. 
Infrastructure lending in 2005 amounted to US $20.2 billion 
representing about XX percent of overall MDB assistance (see table 2). 
The ADB, in particular, invests heavily in infrastructure at close to 
60 percent of overall lending. The World Bank still accounts for 43 
percent of overall MDB infrastructure commitments with the ADB and IDB 
at about 20 percent each. Infrastructure also spans multiple sector 
units at the MDBs. Transportation accounts for a third of World Bank 
infrastructure commitments with the rest roughly split between water 
and sanitation, urban development, and energy (see graphs).

               Table 2: MDB Infrastructure Lending (2005)
                          [Dollars in billions]
------------------------------------------------------------------------
                                Infrastructure     Total
       Development Bank             lending       lending     % of total
------------------------------------------------------------------------
AfDB..........................           $1.1          $2.5           44
ADB...........................           $4.4          $7.4           60
IDB...........................           $3.1          $7.2           43
EBRD..........................           =2.0          =4.3
    USD.......................           $2.4          $5.2           46
WB............................           $9.2         $22.3           41
------------------------------------------------------------------------
Source: 2005 Annual Reports of World Bank, ADB, IDB, EBRD and AfDB.
AfDB: Agriculture and Rural Development (20%), Communications, Power
  Supply, Water Supply and Sanitation, Transport, Industry, Mining and
  Quarrying, Urban Development.
ADB: Transportation and Telecommunications, Energy, Water Supply,
  Sanitation, and Waste Management.
EBRD: Infrastructure (municipal infrastructure, transport), Energy,
  Manufacturing (20%), Agribusiness (20%) and Telecommunications.
IDB: Energy, Transportation and Communication, Industry, Mining and
  Tourism, Multisector Credit and Preinvestment, Productive
  Infrastructure, Water and Sanitation, Urban Development and Social
  Investment (25%).
World Bank: Water, Sanitation and Flood Protection, Energy and Mining,
  Information and Communication, Urban Development, Transportation.

    But there is a compelling decades-long record of the failures of 
many large, high-risk infrastructure projects to produce positive 
development outcomes. Controversy has historically centered on large, 
high-risk, export-oriented infrastructure developments, particularly in 
the energy sector (e.g., Chad-Cameroon, Camisea). These projects are 
premised on promoting growth through revenue generation for the central 
government and rely on the ``trickle-down theory'' for poverty 
reduction. Their success depends upon the existence of transparent and 
accountable public revenue management systems to translate increased 
fiscal revenues into pro-poor investments. Often, they are enclave 
infrastructure projects that generate few permanent jobs and create 
only minimal spillover economic benefits for local business. Sadly, 
these types of infrastructure projects have rarely succeeded in 
reducing poverty or contributing positively to sustainable development 
(details in next section).
    Evidence of these past failures are common. In a refreshingly 
candid report on lessons learned from past infrastructure lending, the 
World Bank recently remarked: ``Infrastructure is complex, 
controversial, and often risky. There is potential for white elephants, 
environmental damage, loss of livelihood, and corruption. We know that 
because we've seen it, and we've been on the wrong side of the equation 
at times, making some mistakes along the way.'' \1\
---------------------------------------------------------------------------
    \1\ ``Shaping Up Infrastructure: Building on Strengths, Learning 
From Mistakes,'' World Bank, 2006.
---------------------------------------------------------------------------
    The World Bank organized a major development conference in Tokyo 
focused on infrastructure in May 2006. A key paper for the conference 
by Antonio Estache, senior economic adviser of the World Bank 
Infrastructure Network, states: ``The most dramatic lesson the 
international infrastructure community may have learned is humility. 
This is because we have collectively found the limits of our knowledge 
on a wide variety of issues relevant to policymaking in infrastructure 
. . . There is, for instance, still a lot of uncertainty on how, and 
how much, infrastructure impacts growth . . . Without more and better 
data on these dimensions of infrastructure service delivery, there will 
be no accountability in the sector. So far, when accountability has 
failed, the poorest users and the taxpayers have tended to bear the 
bulk of the costs of poor service and of corruption.'' \2\
---------------------------------------------------------------------------
    \2\ Estache, Antonio, ``Infrastructure: A Survey of Recent and 
Upcoming Issues,'' World Bank, 2006.
---------------------------------------------------------------------------
    The World Bank's acknowledgement of the complexity and risk of 
infrastructure projects reinforces the findings of two major multi-
stakeholder reviews: The World Commission on Dams (WCD) and the 
Extractive Industries Review (EIR). The WCD (2000) and the EIR (2003) 
provide a rigorous framework and recommendations on how dams and 
extractive industries should be developed and the appropriate role for 
the World Bank in these sectors. The strategic priorities, principles, 
and guidelines contained in these reports are also relevant for 
infrastructure, more generally. In turn, these reports have benefited 
from the active and in-depth monitoring of infrastructure projects 
undertaken by civil society and academics over the past three decades.
    However, the World Bank has rejected several key findings and 
recommendations on dams and extractive industries emerging from these 
reviews. Despite commissioning these multi-stakeholder reviews, the 
World Bank has refused to accept many of the most important 
recommendations of the reports and has instead proposed watered-down 
reforms, cherry-picking only those recommendations that it endorses. 
That said, one of the important recommendations it has accepted is on 
improving revenue and contract transparency--which are essential if 
export-oriented infrastructure projects are to succeed.
    Politics, not poverty, drives the current push for large, high-risk 
infrastructure at the MDBs. The problems posed by large, high-risk 
infrastructure, centralized approaches to infrastructure delivery, and 
the excessive faith in the private sector to provide basic, affordable 
infrastructure to the poor have been well documented. Yet the pressure 
to ramp up such infrastructure lending continues unabated. This 
suggests that lessons learned from past mistakes have not yet been 
internalized and translated into concrete improvements in what sectors 
are prioritized, what projects are selected, and in the design and 
implementation of individual projects. Understanding the politics 
behind the drive for large, high-risk infrastructure--at the expense of 
others forms of ``smart infrastructure'' (defined below)--may help 
explain this disconnect.
    Several powerful interests stand to gain under the current 
scenario. The Ministry of Finance and Ministry of Industry/Energy in 
large borrowing countries often request financial support for large-
scale, controversial infrastructure--as these projects tend to serve 
broader political objectives. The boards of directors and senior 
management of MDBs are keen to lend money--preferably in large 
tranches. Many bureaucrats and politicians gain handsomely through 
widespread corruption associated with large infrastructure. 
Multinational and domestic firms also benefit from sizeable and 
lucrative supply and construction contracts associated with capital-
intensive infrastructure projects. Finally, MDB macroeconomists 
stubbornly adhere to the belief that big projects promote growth and 
this type of growth is most effective in reducing poverty. It is in 
this political context that the challenges of promoting a pro-poor 
infrastructure agenda must be understood.
    Ultimately, the fundamental problem is one of political will. How 
do we generate the will to strike the right balance between different 
types of and approaches to infrastructure; to implement lessons learned 
from earlier infrastructure mistakes; and to act upon recommendations 
articulated in previous Senate Foreign Relations Committee hearings on 
the MDBs? Recognizing that certain types of infrastructure projects are 
more successful in reducing poverty than others is critical to 
determining what priorities MDBs should embrace in their infrastructure 
lending. The testimony below distills some of the most significant 
problems associated with large, high-risk infrastructure. It then calls 
for a radical shift toward pro-poor, smart infrastructure and provides 
specific policy and project recommendations for MDBs to adopt.
     why do large, high-risk infrastructure projects fail so often?
    Large, high-risk infrastructure projects rarely improve the 
livelihoods of affected communities or the poor more generally in a 
sustained and equitable way. There are no doubt exceptions but several 
independent project and sector-level evaluations of controversial 
infrastructure projects confirm this finding. The genesis of the World 
Commission on Dams and Extractives Industry Review was in part an 
explicit recognition of the inability of high-risk infrastructure 
(often energy-export projects) to deliver positive development 
outcomes. A summary of the development impacts and risks of major 
infrastructure projects recently financed by MDBs is provided in Annex 
1 (see Additional Material section at end of hearing). This list is 
telling in that high-risk infrastructure constructed without adequate 
due diligence and safeguards continues to be promoted by MDBs despite 
lessons learned from past projects.
    Five special, significant risks emerge from this list that help 
explain why these projects often fail:
    1. Flawed project selection: The story of large infrastructure is 
often a story of power. Large infrastructure often fails to benefit the 
poor because the wrong projects were initially selected and financed. 
Decision making processes in most countries for identifying 
infrastructure lack transparency and accountability. Powerful, vested 
interests determine which projects are financed and how they are 
designed (with little regard to their impact on poverty). Purported 
beneficiaries and the general public rarely have seats at the table. A 
fair, informed, and transparent decision making process, based on the 
acknowledgement and protection of existing rights and entitlements, 
would give all stakeholders the opportunity to fully and actively 
participate in the decision. Few, if any, of the projects listed below 
could meet this criterion set out by the World Commission on Dams.
    MDBs argue that controversial high-risk infrastructure projects are 
often promoted by their clients. Should MDBs interfere in domestic 
decision making processes? What about country ownership, they ask. The 
problem with this response is that the client is often narrowly 
interpreted as the Ministry of Finance (MoF) or Ministry of Industry 
(MoI); ``country'' ownership rarely includes other ministries or line 
departments, affected communities, elected officials, or the public at 
large. MDBs should ensure that meaningful participatory processes have 
been followed in identifying priority infrastructure before agreeing to 
consider such requests for development assistance.
    2. Inadequate governance: The necessary governance conditions are 
often not in place to enable large, high-risk infrastructure projects 
to contribute to growth and poverty reduction. For example, government 
must have the regulatory capacity to monitor and mitigate a project's 
environmental and social impacts, as well as the administrative 
capacity and political will to manage revenues in the interest of the 
poor. Without minimum conditions such as the rule of law, fiscal 
transparency, a functioning independent judiciary, and free press, 
citizens lack the means to hold their governments accountable to 
poverty reduction goals and social and environmental standards, or to 
seek redress for grievances when rights are violated in the context of 
large, high-risk infrastructure projects. The quality of governance is 
an even more significant factor for export-oriented projects whose 
expected development benefits stem principally from their contribution 
to government revenue, rather than employment generation or enhanced 
local access to services. The World Bank's own Operations Evaluation 
Department (OED) has identified governance as a crucial factor to 
determining the success of these types of large projects in reducing 
poverty: ``. . . good governance is the prerequisite for enhancing the 
positive linkage between increased fiscal revenue flows and sustainable 
development.'' \3\ Although it is unrealistic to wait for perfect 
governance conditions before investing in large infrastructure 
projects, some minimum governance conditions and basic capacity must be 
in place, to help ensure that infrastructure investments benefit the 
poor, and that the local population is not left to bear environmental 
and social costs.
---------------------------------------------------------------------------
    \3\ Operations Evaluation Department, ``Extractive Industries and 
Sustainable Development--An Evaluation of World Bank Group 
Experience,'' Washington, DC, 2003, p. 7
---------------------------------------------------------------------------
    3. Susceptibility to corruption: Certain characteristics of large 
infrastructure--natural monopolies capable of generating large rents, 
big construction and management contracts, etc.--make it particularly 
prone to corruption. According to the World Bank, about half of its 
anticorruption investigations that led to corrective actions are 
infrastructure projects. Corruption has manifested itself in several 
MDB-financed projects listed below including perhaps most dramatically 
in the Samut Prakarn Wastewater Management project. Corruption 
undermines development effectiveness. It can result in the approval of 
unnecessary or suboptimal projects; overly complex project designs; 
excessive project costs; and reduced user revenues. Recent attention on 
combating corruption at the MDBs is welcome but the inherent 
susceptibility of large infrastructure to corruption cannot be easily 
overcome. Thus, there is an apparent contradiction between 
anticorruption efforts at the MDBs and their simultaneous commitments 
to ramping up investment in large infrastructure.
    4. Disproportionate impacts on local communities and the 
environment: A key risk confronting most large-scale infrastructure is 
the inequitable distribution of benefits and costs. Social and 
environmental costs such as physical or economic displacement, 
conversion of natural habitats, water and soil contamination, etc., 
almost always fall upon affected communities located in or near the 
project area. These communities are often the most vulnerable and least 
able to withstand these costs. Such impacts often spark social 
opposition to the infrastructure project, which can at times stop or 
delay the project threatening the wider benefits that the project 
claims to provide. In the case of large, export-oriented infrastructure 
whose development impact depends on the use of the revenues they 
generate for the state, local communities often feel they don't receive 
their fair share of the benefits, to the extent they receive concrete 
benefits at all. Free, prior, and informed consent should be adopted as 
a guiding principle, especially for indigenous groups, to help ensure 
that at a minimum, the poor who live in the project area benefit from 
such major investments.
    5. Shoddy economic and financial analysis: Many large 
infrastructure projects fail to deliver the benefits originally claimed 
because of faulty economic and financial analysis. Cost-benefit 
analyses tend to overestimate revenues and underestimate costs (e.g., 
Yacyreta project). Risks are rarely identified and appropriately taken 
into account when calculating rates of return. Concession agreements 
and project contracts tend to favor large multinational companies with 
key risks usually assumed by host governments. Economic analyses of 
large infrastructure projects should be disclosed and subjected to 
public scrutiny as part of the deliberative public decision making 
process. This will help ensure that the most viable infrastructure 
projects are approved.
    High-risk infrastructure receives a disproportionate share of 
management and staff time that is often not commensurate with the 
projected rewards. In addition to the above risks, the opportunity cost 
of the financial and staff resources devoted to approving and 
supervising controversial infrastructure cannot be overestimated. Not 
only is concessional financing displaced from more viable projects but 
also staff time that could be more effectively deployed to support pro-
poor infrastructure. One can only imagine what innovative, smart 
infrastructure (defined below) projects could have been implemented in 
Chad or Lao PDR if resources deployed in preparing the Chad-Cameroon 
pipeline or Nam Theun 2 dam were channeled into simpler projects with 
more direct and immediate impacts on poverty.

       WHAT IS NEEDED? A RADICAL SHIFT TOWARD PRO-POOR, ``SMART 
                            INFRASTRUCTURE''

    In order to improve their contribution to development, MDBs must 
embrace pro-poor, decentralized infrastructure much more vigorously. A 
significant shift in the portfolio is required from high-risk, capital 
intensive (often enclave) infrastructure to pro-poor, ``smart 
infrastructure.'' I define ``smart infrastructure'' as pro-poor, 
decentralized, and typically small in scale. Compared to high-risk, 
export-oriented projects, it provides more direct and immediate 
pathways to reducing poverty. ``Smart infrastructure'' is also more 
likely to be equitable and sustainable. Characteristics of smart 
infrastructure include:

   More direct and tangible benefits to poor households and 
        communities.
   Decentralized approaches for project design, implementation, 
        operation, and maintenance.
   Prominent role of users in all stages of the project cycle 
        and the role of local governments.
   More amenable to greater transparency and accountability.
   Smaller in size and scale, compared to large national or 
        regional projects.
   Ability to generate local employment and technical capacity/
        know-how.
   Less susceptible to large-scale corruption but close 
        scrutiny still required given widespread petty corruption often 
        associated with small civil works.

    Smart infrastructure also includes investments in promoting 
efficiency gains from existing infrastructure as opposed to building 
new infrastructure. The World Bank recognizes that the challenge is 
striking the right balance in these different types of infrastructure 
investments. Unfortunately, the current political context and power 
dynamics prevent a more optimal mix of investments from being supported 
by MDBs.
    Good examples of pro-poor, smart infrastructure financed by MDBs 
already exist. Examples of smart infrastructure include integrated 
watershed development; rural and urban water and sanitation; rural 
access roads; run-of-the-river hydroelectric projects; renewable 
energy; off grid electrification; traditional water harvesting and 
irrigations systems; community-level common property infrastructure; 
etc. MDBs are already supporting these types of projects but need to 
significantly ramp up their investments in these areas. (Good examples 
of smart infrastructure projects financed by MDBs are provided in the 
Additional Material section at the end of the hearing.)
    The radical shift to smart infrastructure is not to suggest that 
large infrastructure is unnecessary to reducing poverty. Certain types 
of large, trunk infrastructure remain important and the MDBs should 
invest in this area subject to recommendations presented in the 
Additional Material section at the end of the hearing.
   specific policy and project recommendations to be adopted by mdbs
    The recommendations below are intended to help improve the 
development effectiveness of infrastructure financed by MDBs. Political 
commitment is an absolute prerequisite to real change--where the 
commitment is in place, the recommendations can be usefully taken up, 
but without it there is little hope for progress. I would also like to 
endorse the comprehensive set of priorities, principles, and guidelines 
put forward by the World Commission on Dams in 2000 and the Extractive 
Industries Review in 2003. Most of these recommendations apply equally 
well to the challenges facing infrastructure more generally at the 
MDBs.
    The recommendations below are what I believe to be the most 
pivotal, concrete, and practical steps MDBs should adopt to improve its 
infrastructure lending:
    1. Establish explicit sector/subsector lending targets to promote 
pro-poor, smart infrastructure: MDBs have adopted explicit lending 
targets for infrastructure. The World Bank, for example, has stated 
that it aims to increase infrastructure lending to US $10 billion a 
year or 40 percent of the total bank lending by 2008. The World Bank, 
and other MDBs, should commit a certain substantial percentage of their 
infrastructure lending to pro-poor, smart infrastructure. This use of 
lending targets may be a blunt tool but it is particularly effective in 
encouraging a shift in the portfolio, diversifying away from capital-
intensive or export-oriented projects. Key to the success of these 
targets is (a) clarity on which sectors and subsectors (e.g., small-
scale irrigation, renewable energy) additional business should be 
encouraged and the types of projects that would be contained in these 
sectors, and (b) clarity on the methodology for calculating the 
baseline lending levels in each sector. Despite some definitional and 
methodological problems, the World Bank's recent commitment to increase 
lending in renewable energies could serve as an instructive example.
    2. Ensure that a comprehensive and participatory options assessment 
is conducted before a decision is made to proceed with any large 
infrastructure program or project. The proposed solution should be 
based on an assessment of the full range of policy, institutional, and 
technical options to meet an identified need, such as increased 
electricity supply or improved access to markets. The leading reason 
large infrastructure fails to deliver benefits to the poor is because 
the wrong project was originally selected and financed. Options 
assessment--when conducted properly--is an effective way to reduce this 
risk.\4\ All stakeholders should participate in the process but a 
particular emphasis must be placed on the role of potentially affected 
communities. Transparency and participation in the assessment will help 
ensure least-cost solutions are adopted; affected communities and the 
public benefit; and corruption is mitigated. Analyzing the distribution 
of benefits and costs should be an input into the process with due 
weight placed on social and environmental costs. If reducing poverty is 
the objective, emphasis should be placed on solutions (e.g., efficiency 
gains through rehabilitating existing infrastructure or demand side 
management) that deliver benefits most directly to the poor. The SFRC 
should request U.S. Treasury and the U.S. Executive Directors at the 
MDBs to insist that a rigorous options assessment is conducted prior to 
approval of (at a minimum) all large, high-risk infrastructure 
projects.
---------------------------------------------------------------------------
    \4\ MDBs typically require a Study of Alternatives as part of their 
due diligence for projects with major environmental and social impacts. 
The Study of Alternatives--despite sharing some objectives as an 
Options Assessment--has not been an effective tool. At best, these 
studies result in minor changes to project design; meaningful 
discussion of alternatives rarely happens. The Study of Alternatives 
takes place too late--after a project has already been selected and 
feasibility studies have started. Therefore, this in no way can replace 
a real Options Assessment, which is conducted prior to project 
identification.
---------------------------------------------------------------------------
    3. Ensure minimum governance conditions and sectoral capacity 
before investing in infrastructure. Proper sequencing of investments is 
crucial to ensuring their poverty reduction potential. Much as the EIR 
recommended with regard to oil, gas and mining projects, adequate core 
and sectoral governance criteria should be met prior to MDB support for 
large, high-risk infrastructure projects, and particularly those which 
are designed to generate revenues for the host government. 
Infrastructure projects whose poverty-reduction potential depends on 
revenue generation can only succeed in a context in which there are 
basic assurances of a minimum level of government accountability to the 
public. Such conditions include but are not limited to the rule of law, 
a functioning independent judiciary, fiscal transparency, a free press, 
and demonstrated respect for human rights. Given the heavy footprints 
and substantial risks associated with large-scale infrastructure 
projects, the host government needs to have the capacity to monitor, 
manage, and mitigate social and environmental impacts before an 
infrastructure investment is made. Numerous projects (and Chad-
Cameroon, most vividly) illustrate the risk of supporting projects 
before such capacity is in place. It is much easier to construct a dam 
or pipeline than it is to build good governance. Often, the development 
of physical infrastructure far outpaces capacity-building efforts, and 
it is difficult, if not impossible, for government to ``catch up,'' let 
alone to remedy harms suffered while government regulation and 
oversight were absent.
    4. Develop sector-specific anticorruption guidelines. Corruption is 
pervasive in infrastructure and MDBs are vigorously scaling up 
investments in this sector. Sector-specific anticorruption measures may 
help resolve this obvious contradiction. The World Bank (likely to be 
followed by other MDBs) is in the process of developing an 
anticorruption and governance framework to help guide its future 
operations. As part of these efforts, MDBs should develop more specific 
``nuts-and-bolts'' anticorruption guidelines for sectors especially 
prone to corruption. Meaningful public participation in the formulation 
of these guidelines will be crucial to ensuring high quality and broad 
ownership.
    5. Strengthen protections of social and environmental rights of 
affected communities and the environment; upholding the highest 
international environmental and social rights and standards. 
Recognition of rights is an important element in establishing the 
existing entitlements of adversely affected people at various 
locations. Existing entitlements are the basis for negotiating new 
entitlements. The project process must recognize a range of 
entitlements including the entitlement of affected parties to (i) 
participate in negotiating the outcomes of the options assessment 
process; (ii) participate in negotiating the implementation of the 
preferred option; and (iii) negotiate the nature and components of 
mitigation.\5\ International standards and norms should be explicitly 
adopted by MDBs and recognized as the basis for existing entitlements. 
Most important are those related to human rights; no-go zones; free, 
prior, and informed consent; and core labor standards. Some progress 
has recently been made in tethering the development banks to these 
standards but much more is required. This has become even more pressing 
as some private banks and export credit agencies have actually 
surpassed the MDBs on certain topics.
---------------------------------------------------------------------------
    \5\ Recommendation contained almost verbatim in the World 
Commission on Dams final report, 2000.
---------------------------------------------------------------------------
    6. Establish minimum transparency and participation provisions 
throughout project implementation. Public/community participation in 
monitoring and decision making over the life of an infrastructure 
project enhances outcomes. Currently, most MDBs do not require the 
disclosure of project information or public participation during 
project implementation. Because many problems, both anticipated and 
unforeseen, are encountered during project execution, affected 
communities and other stakeholders must be involved in identifying 
problems and selecting remedies, including changes in project design or 
oversight. MDBs should revise their information disclosure policies to 
establish minimum provisions for information disclosure and public 
participation during implementation. This will improve not only 
anticorruption efforts but also the development effectiveness of 
infrastructure projects.
    7. Require robust independent monitoring mechanisms for large-scale 
infrastructure projects. One effective mechanism to help ensure risky 
infrastructure projects contribute to poverty reduction is to appoint a 
high-level panel of ``eminent persons'' to oversee the project during 
preparation and implementation. Chad-Cameroon and Nam Theun 2 are both 
examples for which international advisory groups were constituted. An 
impediment to the effectiveness of these panels, however, was that they 
lacked teeth--the ability to enforce their recommendations. In addition 
to requiring independent monitoring panels, MDBs should also establish 
links between monitoring and accountability mechanisms. This may help 
ensure that the findings and recommendations of monitoring bodies are 
acted upon. The public (in particular, affected communities) should be 
involved in the monitoring and the panel's reports and recommendations 
should be disclosed simultaneously to all stakeholders.
    8. Promote certain policy or operational reforms and good practice 
guidelines to help create an enabling environment for smart 
infrastructure. Lending in support of smart infrastructure is hampered 
at many MDBs because of operational or policy bottlenecks or the lack 
of clarity on some key content issues. A review of which obstacles 
impede additional MDB lending for smart infrastructure would be 
helpful. Possible reforms include:

   Promote the use of small, more flexible lending instruments 
        (such as the Learning and Innovation Loan at the World Bank).
   Community procurement guidelines that allow users to select 
        and monitor construction and technical assistance contracts. 
        Active involvement of beneficiaries is by far the most 
        effective way to shine a light on and prevent corruption. MDB 
        procurement policies and guidelines should be reviewed to 
        ensure that their approach to procurement is consistent with 
        this objective and does not unfairly penalize community-level 
        contracting.
   Promote transparency in project costs and fund flows during 
        project implementation to combat corruption and improve quality 
        of implementation. Information disclosure policies at the MDBs 
        should ensure that disaggregated project costs for 
        infrastructure projects are made available to the public.
   Ensure subsidies are in place for the poor before additional 
        user fees for infrastructure are introduced. This is consistent 
        with and should build off of recent U.S. legislation regarding 
        user fees for social sector services.

    9. Alter staff incentives to focus on development effectiveness not 
lending volumes: The pressure to lend at the development banks remains 
as strong as it has been in the past. This perverse incentive affects 
the type of infrastructure projects that are financed. Large 
commitments and disbursements are easier for large, trunk 
infrastructure and so a bias toward this type of investment exists. 
Reforming the overall incentive structure has proven to be more 
difficult than expected--in part, because existing incentives are in-
built into the structure and processes of how the development banks 
operate and are protected by powerful voices on the board. The pressure 
to lend is most intense at the country level--for country directors and 
their leadership team. I would therefore argue that the most tactical 
place to tackle these misaligned incentives is with the country 
director. Truly independent audits of development effectiveness (and 
specifically the poverty impacts of infrastructure projects)--not 
lending volumes--at the country level need to be conducted. Performance 
evaluations of the country director (including benchmarks for 
promotions and layoffs) must be based in large part on these audits. 
The rationale for these independent audits at the country level is 
similar to the arguments put forward in the previous Senate FRC hearing 
on the MDBs. A specific intervention to shift management incentives at 
the country director level may be more acceptable and in the long run, 
may help catalyze wider reforms on staff incentives.
    10. Set up a small, independent evaluation unit to measure impacts 
of infrastructure lending in reducing poverty: Donors to MDBs should 
establish a small, independent evaluation unit to examine the poverty 
impacts of infrastructure. This recommendation follows the unambiguous 
conclusion reached in the previous SFRC hearing by Easterly, Lerrick, 
and Levine on the need for real independence and objectivity in the 
evaluation process. A pilot initiative could be designed to evaluate a 
sample of infrastructure projects approved by MDBs over a 3-year period 
and based on the results to provide concrete guidelines on (a) how to 
improve the poverty impacts of infrastructure, and (b) how to put in 
place more effective monitoring and evaluation systems to measure the 
results of infrastructure investments. Given the increasing 
significance of infrastructure to MDB portfolios, an independent audit 
on infrastructure would be a useful place to begin. Such a pilot may be 
politically more acceptable to the MDBs than a whole-scale and radical 
change to the so-called ``independent'' evaluation departments.

                           CONCLUDING REMARKS

    I would like to thank you, Mr. Chairman, for the opportunity to 
share our views today on infrastructure, poverty, and the MDBs. I hope 
that the testimonies provide the committee with constructive and 
concrete ideas of how to improve the development effectiveness of 
infrastructure lending. Infrastructure represents the largest share of 
MDB commitments financed today and the share is increasing. The success 
of the MDBs in achieving their missions depends in large part on 
infrastructure projects improving the lives of the rural and urban 
poor.
    This hearing reflects a positive evolution of the topics discussed 
before the SFRC. The committee has been particularly successful in 
elevating the issue of corruption on the development agenda; it is our 
hope that it will be equally successful in catalyzing serious 
reflection and reform in the infrastructure lending practices and 
policies of the MDBs.

    The Chairman. Well, thank you very much, Mr. Bapna, for 
your testimony, and your extensive statement, which as you have 
indicated, gives the committee a lot of guidance from your 
experience.
    Let me begin the questioning by simply noting--and I think 
the testimony that witnesses have given in their full 
statements clearly illustrates this, and this came through, I 
believe, in specific testimony--but in the Camisea natural gas 
project in Peru, the total cost, at least the committee is 
advised, was about $1.7 billion. Now, the fact is that the 
Inter-American Development Bank's loan was $135 million, so I 
think both of our first two witnesses have made the point 
correctly that obviously we are concerned today about the 
Inter-American Development Bank, the multilateral development 
bank situations, but in this particular case the bulk of the 
money came from somewhere else.
    And that was clearly true once again in the second issue 
we're talking about today, the Chad-Cameroon affair, where 
about $4.1 billion was invested, 85 percent by private 
companies. Then there were three loans from the World Bank 
essentially of various amounts. Perhaps this is consistent with 
Secretary Lowery's testimony. We went through a period of time 
in which a good number of large projects in developing 
countries occurred through the private sector.
    Now, one reason that this is clearly the case in the energy 
field is that this is an extremely important field for almost 
every country in the world seeking a degree of energy security 
and/or advantage from the extraordinary increases in prices 
paid for natural gas and for oil, which makes a big difference 
in the economy of countries.
    My friend, Tom Friedman of the New York Times, has written 
extensively about this, and we have been discussing his 
contention that as revenues from energy come into a country, 
the desire for democracy seems to diminish. Now, the desire may 
be there with the people as a whole, but not necessarily with 
the leadership of the country, given extraordinary new revenues 
and new possibilities for authority, even strategic use of 
those revenues to either reward or deprive other customers of 
their benefits.
    We are intersecting here today an important issue about 
development and corruption, but likewise, a very big issue in 
our world about the strategic use of energy and the political 
authority that comes in that respect, so I think we all 
understand that. The viewers of this hearing will not fear that 
we are in an esoteric intellectual atmosphere, oblivious of 
what is going on in the world. We understand these facts.
    Now, having said that, however, the responsibility still 
falls upon the development banks for what their 
responsibilities are. And as Mr. Lowery from the Treasury said 
earlier, and other witnesses, and each of you in your own way, 
those responsibilities have been developing, some of us hope 
swifter rather than slower, but nevertheless there has been 
movement, hopefully stimulated somewhat by our hearings and all 
sorts of other hearings around the world, because I'm sure 
others are paying attention to this.
    I'm curious, having said all of that, that you testified, 
Mr. Quijandria, that about 50 percent of the royalties from the 
Peru project go to the provinces, and 18 percent, as I gather, 
to the neighborhoods really, of the pipeline itself, those most 
affected by this. But I was struck by the thought that even 
after these revenues go to these provinces, presumably the 
local governments, authorities, whoever is responsible, the 
capacity to spend this money is suspect or maybe not existent.
    In other words, what is the responsibility then for whether 
it is the World Bank or the Inter-American Development Bank to 
try to help build capacity? Is this an extension too far of the 
witness that should be there? Because it's an important point 
to make.
    These are large sums of money that are flowing out to the 
provinces, but nevertheless the fact that they're heading out 
there does not necessarily mean that they may arrive to help 
the poor or the persons who are most deprived. It could very 
well be that the local governments are not all that competent, 
or worst still. Or even if they are earnest people trying to do 
a good job, the sophistication with regard to the use of that 
money, the management of it may simply not be there.
    What, from your experience, do you have to say about that? 
How do we make a difference, so that even if there is a 
distribution--and I'm not advocating 50 percent--you are saying 
essentially the problem is that money is not being very well 
spent or maybe not even spent at all. Can you amplify further 
on that?
    Mr. Quijandria. Yes, Mr. Chairman. I want just to give you 
a piece of information. We had Camisea as the main issue of 
cafe conversation and headlines of the newspaper for almost 20 
years. We're discussing how to do Camisea.
    The Chairman. I see. In Peru, it has been discussed for 20 
years.
    Mr. Quijandria. In Peru. The state company should do it. 
The whole of the benefits should go to the region. So the price 
the Peruvians, we have paid so far, is that high expectation of 
the Peru population, that there is no chance of doing any 
infrastructure project, mining, oil and gas, unless you 
compromise an important amount of revenues for that population. 
That's the turning point.
    The Chairman. So that's the political expectation?
    Mr. Quijandria. Yes.
    The Chairman. You start out looking for natural gas. You 
anticipate that a big percentage is going to go to the poor 
through infrastructure.
    Mr. Quijandria. They consider they own the reserve, they 
own the resources, so they are entitled to have an important 
part of revenues. The problem, Mr. Chairman, is that once we 
have internalized that and we have decided politically that 
that is the only way to develop infrastructure, now we have to 
build that capacity. We have to give them the means in order to 
spend that money.
    And the World Bank and IDB, working probably in different 
regions, are working from the grassroots, giving the most basic 
tools to the municipalities, to regional governments which were 
created 3 years ago. Regional governments never existed in 
Peru. So now we have 24 regional governments with the 
bureaucracy which is probably oriented to handle services and 
not necessarily to construct infrastructure.
    The Chairman. So this is 3 years old, the infrastructure, I 
mean the governments at the local level?
    Mr. Quijandria. Yes.
    The Chairman. And prior to that, the central government ran 
it all, essentially.
    Mr. Quijandria. So we are in a learning process, Mr. 
Chairman, that probably will take some years. I don't think 
that it's going to be solved in a couple of years.
    The Chairman. How does the World Bank intersect now with 
these new governments, the 3-year-old governments? How does 
that work?
    Mr. Quijandria. First of all, Mr. Chairman, I think an 
early engagement is crucial. IDB and World Bank should be 
present hopefully in the design of the project. The problem 
with Camisea is that I praise very much the continuity of 
policy, but there is also costs of continuity.
    We had to take a process which has already been negotiated 
through an international bidding process that this government 
couldn't change. Probably the solution was to say 44 months to 
construct this complex project is too little, let's extend it, 
but that was opening again.
    And something that Camisea has got has been transparency. 
The government has been very clear to put all the figures on 
the Web, so you can go anytime, and that's the reason why 
people really are not satisfied, because they see that there is 
a lot of money waiting, and they are poor, they don't have 
services. As Mr. Herrera mentioned, 25 percent of the 
population doesn't have electricity service, and they say, 
``Why? There is money.'' Specifically the people from Cuzco, 
they are already receiving more than $200 million so far and 
there are very little results, I have to admit.
    The Chairman. So the local government of Cuzco is not able 
to plan or to execute, or why?
    Mr. Quijandria. There were local, regional plans. There are 
no staff trained in order to carry out projects. Our national 
administrative standards are probably too high for provinces. 
We have to lower them, and specifically we have to do a lot of 
training.
    The Chairman. That's a very important set of facts for all 
of us to consider. The development of local government, as you 
say, sort of a 3-year gestation period, suddenly $200 million 
or whatever; and the staff; the expertise; and the new 
standards; everything that's anticipated by the poor, all 
coming upon these people.
    You know, having been mayor of a city in our country, I 
understand the expectations of the people at the local level, 
but we had staff. We had an infrastructure of the business 
community and lots of other people to help. So as we're taking 
a look at these situations, whether it's Peru or Chad or 
Cameroon, it's important for us all in a much more 
sophisticated way to try and understand the governance of the 
countries, the development of that.
    But, having said that, it is still a lot of money, and 
apparently maybe another project coming along which produces 
more money and therefore more expectations, I suspect.
    Mr. Quijandria. Mr. Chairman, just for the record, IDB gave 
$75 million to finance the project. CAF, which is the financial 
Andean corporation, gave $50 million. $300 million was provided 
by local private investors. But the leverage of IDB has been 
very high. Although they only participated with $75 million, 
they practically compromised the whole consortium, even the 
downstream consortium, which was not involved in the financing, 
to accomplish certain levels to carry out environmental and 
social reforms.
    The Chairman. Well, it's a very important point you have 
just illustrated again. I gave these figures, the total of $1.7 
and then over here $135 million. As you say, the leverage from 
the $135 million has engendered all of these attempts for 
reform, apparently.
    So the international development banks were getting their 
money's worth in terms of the amount of participation to begin 
with. However, that's the job of the banks. That's the 
involvement here. If it had been totally private, we would not 
be talking about it today, I suspect. We do have this 
international development, including taxpayer money of the 
United States, of our own citizens, as they contribute to these 
banks.
    Mr. Herrera, you mentioned at the outset of your testimony 
that as this proceeded, this $1.7 billion investment, the 
objective was energy security for Peru. That doesn't mean that 
people didn't think about some good things that might happen in 
a humanitarian way and help poor people at the grassroots, but 
essentially your judgment is that by and large the Peru 
Government, as a people, were thinking about energy security, 
and so they built the pipeline.
    Now, eventually some other loans came along in this 
process, but describe a little bit more from your own 
recognition, and both of the first two witnesses have been 
heavily involved in decision making in Peru. What sort of 
energy security did Peru need? Why was there an interest in 
this kind of investment or seeking it, from wherever it came?
    Mr. Herrera. Mr. Chairman, Peru has only, until now, only 
two significant sources of energy, of raw energy--I mean--oil 
and hydropower. So power can be fully completed, it's not 
advisable to do 100 percent, but it can theoretically be fully 
completed with hydropower. We have hydro resources much more 
than we will require now. But we don't have fuels, and the 
dependence of oil means a really strong constraint for economic 
growth of the country.
    The only resource the country has in enough amount as far 
as to support political change of fuels, an energy matrix 
transformation, is Camisea, is the natural gas. That's why, in 
the compromises of natural gas, it was fully to export the 
liquids, but in the case of the gas, the condition is that the 
gas could be exported only when the next 20 years of local 
market are ensured to supply, because if in some moment after a 
long wait that means to transform an energy matrix, we feel 
that we don't have enough gas, we will become importers, and in 
that case the situation is worse than being oil importers.
    That's the point. And of course, together with this, but 
this is the main reason for the project, there were others. The 
project was committed in order to complete the high standards, 
the high international standards about environmental, about 
communities, about whatever.
    The expectation of the people were great. All the problems 
of noncapacity for expending the money and so on were known 
well in advance. Something must be done, since the beginning of 
the project, in order to arrive at the goals at the same time 
being developed the capacity of using that money together with 
the arrival of the gas.
    I ironically say, in some moment, that we care very much 
that the consumers of California and of Mexico will have the 
gas which is for the Peruvians. That was one of the main 
problems of Camisea. That's why we lack infrastructure, we lack 
plans, we lack the requirements in order to develop the 
capacities, knowing well in advance that we don't have that. 
It's true what Mr. Quijandria said. It's critical for the 
country. It touches not only the results coming from Camisea, 
all the resources of the country, mining and whatever.
    And what is the reaction of the population because the 
state is not there? The reaction of the population is to 
reclaim to the companies, so the companies face the problem 
that they are paying their taxes, they are paying their 
royalties, but this money doesn't arrive to the communities, 
and the communities reclaim in front of them and they bring 
social instability for the country. This is a very big problem.
    That's why in the latest results the country was divided. I 
mean the elections. The country was divided into three regions. 
One is Lima, that voted for one option. The second one are 
those areas in the coastal area where agriculture has very well 
performed, who voted for today's elected president. But all the 
rest of the country voted for a third option that would be 
terrible for the country, and we still have that in the future. 
This has not been over. So we need to work quite well in order 
to avoid having that option in the future, and the only way of 
doing that is a good development of the country, is a good use 
of the resources.
    What I feel is, you don't only need to have willingness, 
it's necessary to have some talent in order to make the things 
happen. What happens is what you try it happen, but if you 
don't work in that, other thing will happen. That is the 
situation of the country.
    And that's why also I consider that it's very important to 
have the support of the institution like IDB. Without them, 
believe me, the situation will be much, much worse. But they 
cannot implement the recommendations if the government has not 
the capacities. They cannot go beyond certain limits that are 
established by the government, so it's the responsibility of 
the government, who has to improve its capacity, improve the 
capacity of the officials in order to do a good job.
    That's the point. So what I mean in your question is, the 
big goal, the most important goal of Camisea was that of energy 
security. We are going to force the people to invest in 
changing oil energy matters to gas. What are we going to say to 
them if in 20 years we have not more, or in 15 years, after the 
period when the things are going to develop, we cannot sustain 
that? That would be a worse situation for the country. So a 
balance there is necessary, and that's why I say that we shall 
not build Camisea II, betraying Camisea I.
    Thank you.
    The Chairman. Well, that's very important testimony, beyond 
the scope or the capacity of this hearing, which really comes 
down to the performance of the banks and so forth. Both of you 
have given such a rich history of Peru in the last generation, 
through the various administrations and the different 
objectives, even the most recent political campaign, the 
division of the country as people take a look at these issues.
    And they are looking in countries all over the world that 
have suddenly come into riches, energy resources, and do not 
have the capacity, and do have governments and do have money. 
Sometimes the conflicts here are extraordinary, and they are 
important for the foreign policy of the United States, in 
understanding in a more sophisticated way the evolution of 
affairs.
    You have made, I think, an excellent point, that even if 
there is a small participation by the World Bank or the Inter-
American Development Bank, this offers the leverage that can 
make great differences for the people as we try to work with 
Peruvians or other citizens to bring about greater local 
capacity through our exchange programs, through American NGOs 
that sometimes participate so productively, to try to make sure 
that there is some decision making group that can make a 
difference.
    And that will have to be the case or there will be broad 
divisions about these whole projects, either success, failure, 
or what have you, when the fact is that the revenues are going 
to come in, the energy security of most countries is going to 
happen, and the question is whether we take advantage of these 
new revenues from the production.
    Well, let me turn to Chad and Cameroon, and I would ask 
first of all from the experience of both of you as veterans of 
the trail, literally, of taking a look at developing 
governments, including the one we're talking about today. What 
is the status of democracy in Chad? As a practical matter, if 
you were to apply, as we have talked about metrics, 
expectations, what is the governmental capacity of that 
country, leaving aside whether the decisions it is making are 
humane or equitable? Dr. Horta, would you have a try at that, 
sort of filling in the big picture of what we're looking at 
here?
    Dr. Horta. I would certainly like to try. About the status 
of democracy, Chad just had presidential elections in early 
May, and President Deby had himself reelected president. In the 
previous year, he had the constitution changed to end 
presidential term limits, and basically many people suspect he 
wants to become president for life.
    From the outset it was known that these elections were 
going to be so fraudulent that the opposition boycotted the 
elections, and independent election observers from abroad 
didn't even bother visiting Chad for the elections because 
there wasn't going to be much to observe there. So that is 
unfortunately the state of democracy.
    But I would like to mention a very hopeful initiative 
actually launched by Chadian civil society, a broad cross-
section, including the churches, the development organizations, 
human rights organizations, et cetera. It's a peace and 
reconciliation initiative that is very promising. It calls upon 
the government as well as the military, as well as the 
different rebel groups in the country and civil society, to get 
together, sit at the same table, and start paving the way in 
Chad toward genuine democratic reform.
    I think this is the most promising thing to be done in a 
country that continues to be wreaked--wreaked by different 
rebel movements in different parts of the country and by 
tremendous discontent, including as I mentioned within the 
ruling ethnic group, the Zagawa group, which comes basically 
from the Darfur region, the Chadian side of the Darfur region.
    Concerning government capacity, I could not agree more with 
my fellow panelists from Peru. Our experience too, is that 
often the policies are good, the standards are good. What's 
lacking is the capacity to actually implement those on the 
ground.
    The Chairman. Who will do the job, yes.
    Dr. Horta. Exactly, and that's of course a very hard thing 
to do, and it may be time-consuming, but that's where I think 
from our experience that much of the MDB energy should be 
focused, building the capacity. And it cannot be done, as the 
Chad-Cameroon and other projects have shown, it cannot be done 
simultaneously with the physical construction, let's say, of an 
oil pipeline or a large dam or whatever. It has to be done 
before, so that these basic structures, the basic capacities, 
are in place before you actually get started. I think that has 
been a central recommendation also of the Extractive Industries 
Review that I have mentioned.
    I also wanted to get back to your point where you said 
that, well, you know, the World Bank just contributes a small 
percentage of the actual amount that this project costs. This 
is of course correct, but World Bank financing often does play 
a catalytical role in the Chad-Cameroon project, and I'm sure 
in many other projects around the world.
    In the Chad-Cameroon case, Exxon Mobile made it very clear 
that they were not going to go ahead with this project without 
the World Bank's involvement, not because Exxon Mobile needed a 
few hundred million dollars from the World Bank, certainly not, 
but because it provided a level of comfort. They knew that the 
Government of Chad nor the Government of Cameroon would 
expropriate----
    The Chairman. That's an important point, that they thought, 
in terms of the international community, that they needed a 
framework of governance, of legitimacy that came from this. So, 
as you point out, we have $4.1 billion coming from somewhere 
outside of these banks, which is a lot of money, 85 percent. 
But, in any event, your testimony is that Exxon Mobile, just to 
name one firm, said, ``However, we want to have the blessing of 
the World Bank on this business.'' That's important, I believe, 
as to how any sort of leverage comes into this business.
    Dr. Horta. Absolutely. It's exactly that point, and in 
addition, you know, to having a global governance kind of 
structure via the World Bank, the other reason why 
international corporations do like the involvement of the MDBs 
is of course because it helps attract many other funding 
sources into the same project, and therefore makes these 
projects possible in the first place. Many of them wouldn't 
take place without the small percentages of cofinancing from 
the World Bank and the other MDBs.
    The Chairman. Mr. Bapna, would you join in this dialog?
    Mr. Bapna. I surely would be more than happy to. I 
completely concur with the points that were made earlier about 
the importance of capacity as a prerequisite to ensuring that 
many of these policies and practices are actually put in place 
properly. But I also want to take one or two steps back and 
say, in addition to capacity, there has to be the commitment--
the commitment, the political will to actually make these 
difficult decisions, and this is where some of the commentary 
about governance strikes a strong chord in these deliberations.
    The Chairman. In that case, now, for instance we have 
talked about Peru, and they have developed local governments in 
the last 3 years or so, but in Chad, how would the political 
will be exercised? You have the president, apparently president 
for life and so forth, but who else is involved, or is there 
anybody involved in terms of this political will?
    Mr. Bapna. I mean, I'll defer to Korinna to speak a little 
bit more specifically about Chad, but I think the challenge 
there is that the Bank recognized that there was a real risk in 
terms of political commitment. And so they tried to put in 
place a number of mechanisms to address, to try to mitigate the 
risk of that, in part by having these escrow accounts, kind of 
an offshore escrow account, in part by having this college, 
this civil society kind of multi-stakeholder oversight 
mechanism about how revenues would be used. They also 
informally conveyed conditions about future lending to the 
country.
    But I think what the last few months have demonstrated is 
that despite that, once a decision is taken to approve the 
project, much of the leverage that the Bank may have had 
withers away. And then you saw what actually took place in 
terms of the decisions that the president took and the corner 
that the Bank was placed in.
    And I think that the challenge remains. It's a real 
challenge, and I think we're still struggling to try to 
understand how best to assess minimum kind of governance 
benchmarks or criteria that would justify major investments, 
major risky investments, particularly investments that--and 
both these projects are of that case--that are revenue 
generation projects. The rationale for these projects is not 
necessarily to serve a broad set of domestic users. It's about 
generating resources and using those resources wisely, and for 
those types of projects it elevates the importance that has to 
be attached to these governance issues.
    I'd like to perhaps also say that even if one were to take 
a step back, I'd like to underscore the importance about the 
process of how these projects are selected, and what I called 
earlier this concept of a comprehensive or participatory 
options assessment.
    In part, I feel that oftentimes the Bank gets caught in a 
dilemma by having to make very difficult assessments on these 
particular projects when it is unclear whether or not a truly 
transparent participatory options assessment has been done 
beforehand, prior to a project being selected, to find out what 
is the technically most viable, feasible way to deliver on a 
particular good. And oftentimes it may not necessarily be the 
project that is ultimately put forward by the Bank. And so I 
think if the Bank were to more actively encourage and engage 
and ensure that a proper options assessment was done upstream, 
it would diminish the risk that you would end up with having to 
face a difficult tradeoff on whether or not to support a 
controversial project.
    The Chairman. I am just curious. You mentioned the college, 
and this is sort of the hope of an independent group of people 
in society who are offering advice. How do they fit in with the 
president of Chad? What view does he take of these people? Are 
their civil liberties threatened? Are they free to editorialize 
and make speeches? How do things work in Chad, so that there is 
some check and balance there? Do you have a thought about that, 
Dr. Horta?
    Dr. Horta. Power in Chad is in the hands of the president, 
and the oil project has further consolidated his grip on power 
because he has means available to him now that he didn't have 
before. It's like all the taxes and the customs revenues that 
he is receiving through the oil project. He controls--he 
largely controls them.
    Now, the College de Controle, this oversight committee of 
course is a very good idea, and the Treasury Department 
actually deserves thanks to have----
    The Chairman. That's the U.S. Treasury Department, right.
    Dr. Horta [continuing]. The U.S. Treasury Department 
deserves to be thanked for the technical assistance it has 
provided to this college. Its composition is both people from 
the governmental side, actually the majority, and civil 
society. And under very difficult circumstances--they have no 
autonomous financing, they are very underfinanced, they are 
understaffed, they have a lot of difficulties--even under those 
circumstances, they have tried to do and have done a very, very 
good job.
    Last summer they issued a report that the Financial Times 
actually reported on extensively, showing that much of the 
money that they had a chance to review was lost to corruption, 
that there was no comparative bidding, there was overpricing, 
there were all kinds of problems. Actually in this same 
Financial Times article, the Bank expressed already then--this 
is, you know, just a year ago--a big concern about what was 
actually happening to the revenues in Chad.
    But the main problem of this college is that it can issue a 
report, but then it cannot do anything further. There is no 
functioning judicial system in the country. There would be no 
court, you know, where the college could turn to and say, 
``Here, we have had all these corruption issues. Can you 
further look into this and investigate, indict, convict, 
whatever.'' No, it just stops there. The college lives by the 
grace of the international donor community, the World Bank, the 
U.S. Treasury Department, and it's doing valuable work but it's 
of no real consequence.
    So one of the things that we would hope will happen as part 
of the renegotiation that the World Bank is currently having 
with Chad on the revenue management would be a strengthening of 
the college, and providing it with all the resources that it 
needs to function properly.
    The Chairman. I think we would all encourage that that be 
the result of these renegotiations.
    Now, just to be devil's advocate for a moment, skeptics 
coming into this hearing at this point would say, ``Now, get 
real, folks.'' Here you have a situation in Africa, in which I 
saw this in a country that was not too far from Chad, in Libya, 
for example.
    I spent 2 nights in the Corinthia Hotel there in Tripoli, 
and there were a large number of people from India and China, 
so I was inquiring about why everybody is here in such numbers. 
Among those who wanted to converse about the subject, they in 
essence said, ``We're here to pin down about the last square 
mile of the country in terms of preemptive rights for energy 
resources, and for that matter we are about this task in many 
states in Africa. Libya is not the only one.''
    In short, in a competitive world in which countries are 
seeking their energy security, having large populations like 
India and China--and I don't fault them for looking out after 
their citizens, how they're going to progress--they are 
thinking ahead. Where are the resources, anywhere on this 
earth, and what are the values, and how do you bid them up in 
competition?
    Now there are some United States interests involved there, 
but at that particular time we had just a very small number of 
consulate people there. That has been changed as a policy of 
our Government, subsequently. We're going to establish again an 
embassy and establish the possibilities of dealing with Libya 
and the area.
    But at the same time the Chad situation illustrates, at an 
earlier time but maybe evolving if Chad develops more resources 
of this sort, our testimony here in the committee records, 
which is derived from your expert witnesses, that about 118 
million barrels of oil were produced there in Chad. You know, 
that's $10 billion worth of revenue, more or less, at world 
prices, coming into a relatively small country, and the meter 
is still running as we're talking today. More barrels are being 
produced.
    And by and large, the world rejoices. Thank goodness that 
is the case, that the supply side, which is so narrow over 
world demand, is somehow being helped, even if by somebody who 
seems to be taking on authoritarian characteristics. And so 
these compromises keep occurring.
    I emphasize this because I admire the leadership of the 
World Bank in trying to tackle this. You know, our purpose at 
this hearing is not to pounce upon the development banks. They 
are the heroes of the situation, to the extent that they have 
any leverage whatsoever in what we have already described as 
two situations in which the tremendous bulk of the money came 
from elsewhere. They had nothing to do with it.
    But because of these other loans, and the interest of our 
Treasury Department which you have cited and which I would 
again, and our State Department and others, there begins to be 
some hope for a dialog here. It could be ignored by the 
President of Chad, but there is this college group or others 
who are at least piping up and giving an opinion with regard to 
this.
    But the way the world works, things are not necessarily 
working in favor of those who are trying to build democratic 
institutions. And that's a whole subject for a different 
hearing, how energy intersects with democracy, but it 
intersects in a big way here, in Chad. And so the question is, 
how do we support the World Bank, the reforms that are 
occurring internally, which I have cited today, and continue 
that movement which I think is important, and which perhaps we 
did not see prior to a short time ago. We certainly applaud 
this movement.
    I would just ask either one of you, Dr. Horta, Mr. Bapna, 
do you have some optimism about that trend, with Chad as a 
citation, but likewise other situations in which you are both 
involved? Do you see some hope for this civil dialog to 
progress to the benefit of infrastructure that helps support 
people in the countries that are being served? Yes, sir.
    Mr. Bapna. Just a few points in response to that very 
important question you posed. There is no doubt that the 
competition for energy resources around the world today is 
escalating incredibly, and that even if the multilateral 
development banks were not to support some of these projects, 
clearly there is----
    The Chairman. They are going to do it anyway.
    Mr. Bapna. Many of them, not all, but many of them will go 
ahead in any case.
    The Chairman. Yes.
    Mr. Bapna. But I think, to this point, we need to avoid 
what oftentimes is a common fallacy. That is, just because the 
involvement of a development bank improves a project doesn't 
mean that the bank must be involved with any project that it 
can improve. To put it perhaps in another way, just because 
there is a poorly designed, destructive project that the bank 
can do better, doesn't mean that the bank should be involved in 
that project.
    It's also important to note that the banks collectively 
committed in 2005, $20 billion in infrastructure, and that's a 
drop in the bucket. The amount of overall--the need for 
infrastructure lending is considerably orders of a magnitude 
higher than that.
    So the question that I believe the development banks have 
to ask is how to be as selective in their investments. As the 
infrastructure needs to escalate, they have an opportunity to 
really model the way to support innovative, truly pro-poor 
infrastructure projects that emerge in a transparent 
participatory process. They should be, in light of this kind of 
broad landscape, particularly selective in what they actually 
support. They should uphold the highest international standards 
on transparency, on corruption, on participation, on 
environmental and social impacts. And on that, it's useful to 
note that the United States has oftentimes been a lone voice in 
advocating for stronger standards on the board, and there is a 
need to develop broader political support from other members of 
the board of directors for higher standards on these issues.
    I think in terms of where, let's say, the World Bank is in 
terms of its ability to take on this challenge as the need for 
infrastructure escalates, it's a bit of a mixed bag right now. 
There is the recent report that you referred to earlier in your 
opening remarks or in your questions. That was a particularly 
candid and honest, reflective report that I think the Bank 
should be applauded for in terms of preparing. Whether or not 
they will operationalize some of the main lessons that were 
learned remains to be seen, but I think that at least they have 
a better sense of what some of the mistakes were in the past.
    But I would like to highlight a recent development that 
took place that's somewhat troubling, which is, just about 2 
weeks ago or so the World Bank dismantled its environmental and 
social sustainable development vice presidency and integrated 
in with the infrastructure department. And despite some of the 
rhetoric that indeed this will allow better integration, better 
mainstreaming, many of us on the outside are particularly 
concerned that this shift signifies subordinating common 
environmental and social issues to the need to lend, the need 
for infrastructure.
    So to your question about will the Bank learn from its 
mistakes in the past, I think the jury is still out. I remain 
committed to trying to support them in doing so, but I think we 
could use further attention on this matter.
    The Chairman. Let me just ask if any panel member has 
further comment at this point. Yes, sir.
    Mr. Quijandria. Thank you, Mr. Chairman. I was invited to 
talk about Camisea, but I know some facts about Chad-Cameroon, 
being a member of the board of the World Bank.
    The Chairman. Yes.
    Mr. Quijandria. My impression is that we have had very 
important pressure not to finance infrastructure projects, and 
if you see the figures of the lending process of the World Bank 
during the last 10 years, you will notice that infrastructure 
went down $4 or $5 billion before Mr. Wolfensohn decided to 
take gain and not work the curve.
    The extreme case that I have been familiar with is the case 
of a hydro project, Nam Theun 2 in Laos, which took 12 years to 
come to the board, and we spent more than $15 million 
developing the project, which is more than the total amount of 
aid that the World Bank was giving to Laos.
    So this is the kind of lessons that we learned that 
probably gives us a very clear idea that we should not only be 
engaged, but we have to be very clear that the additionality of 
the Bank is very clearly to be proven. It's clear that the Bank 
has a tremendous 60 years of experience on infrastructure. 
Probably no other institution, financial institution, in the 
world has had the experience that the Bank has with roads, 
hydros, and whatever. So we think that we should remain 
engaged.
    And, second, I want to tie this to a comment on energy 
security, and this is specific for our region. My difference of 
opinion with Mr. Herrera probably is that he is pessimistic 
about the results that we are going to find and I am 
optimistic. I think that we should think in terms of developing 
the infrastructure because we are going to find more gas. 
There's no question about it.
    When Bolivia signed the contract with Brazil to sell it 10 
billion TCF, the reserves at that time were 6, and now Bolivia 
has 35 or 40 billion reserves. So my hunch, Mr. Chairman, if 
you allow me, is that we are going to find more gas, and 
probably will be very shortly dealing with the problems related 
with it.
    As to the kind of project that this institution finances, I 
couldn't be more in agreement that we should avoid the kind of 
projects which are probably not the consistent. This 
fortunately is not the case of Camisea. We have debated Camisea 
for 20 years, as I told you before, so this was very ripe and a 
very good project to be financed, and I think the involvement 
for IDB has been not only beneficial for the Peruvian 
Government and for the companies but also for IDB. They have 
learned a lot on this project, although there have been quite a 
lot of criticisms and probably a lot of discussion in the 
newspapers on it, but it has been beneficial, all in all.
    The Chairman. Concluding on an optimistic note there about 
additional reserves as well as improvement of capacity and 
learning.
    Mr. Herrera, do you have a final comment for us today?
    Mr. Herrera. Yes, Mr. Chairman. Well, being pessimistic or 
optimistic, it's relative. I prefer to be realistic, and the 
source of realism is the history. In Peru in the 1970s, for 
first time we are led to be, after so many years, net importers 
of oil. And our government and military, our leftist military 
at that time, proceeded the visit of a very well-reputed German 
geologist, and he says more or less that Peruvian jungle was 
like the Mariciabo Lake. It was floating in oil.
    They have a grounded state oil company, Petroperu, and of 
course Petroperu has not enough equity or capital in order to 
drill so much. They make three drills in three different 
places, and they found oil. So on the theoretical basis for 
being floating on oil, and after three successful drillings we 
shall suspect that we have plenty of oil. We need to bring the 
oil to the coast, so we built a pipeline, an oil pipeline. Even 
with the technology of that time--it doesn't spill like today's 
with highest technology.
    And one problem was, what will be the diameter of this 
pipeline? Because it will be related to the capacity. So it was 
dimensioned for the oil already found and for what we will find 
in the future. It happened 30 years ago. We never found more 
oil that could be economically transported. So I just think 
this story says it happened to us once. Are we going to make 
the same mistake for the second time?
    I am also optimistic in the sense that we are going to find 
gas, so I say as the original contracts work, let's dedicate to 
exportation the gas that we are going to find, and let's 
dedicate to Peruvian security the gas that we have already 
found, with investment that means expending $500 million in the 
jungle in that time. But let's not dedicate the gas that we 
already have to exportation and wait to find new gas for 
certifying the growth of the country. This is practically the 
main difference.
    And regarding what happened to Camisea I, it's in the 
written testimony but I probably forgot to say that an 
investigation has been asked about how the project has 
performed. What is clear is that there have been five spills, 
and we can realistically suspect that everything is not well-
built. There are failures in some place, either in the design, 
either in the construction of the pipeline, or more probably in 
the soil.
    But we need to clarify that before, because only source of 
gas, significant, relevant gas in Peru is Camisea, and we are 
linking the economic area along the coastline to the Camisea 
fields through one pipeline. So the reliability of the supply 
depends on this one pipeline, and we cannot continue growing 
with the supply to the commercial areas, to the central 
economic areas, without being sure that at least this pipeline 
shall perform well.
    According to the contracts, it has to meet certain levels 
of availability per year. In the 3 years that it is working, 
not a full year in 2004, not a full year in 2006, it has not 
committed the compromises. It has performed far below of what 
it has been compromised. Then we need to be sure in the future 
that it will work properly. And I will recommend to tie Camisea 
second stage to being sure that Camisea first stage pipeline 
will work properly.
    Thank you, Mr. Chairman.
    The Chairman. Good counsel.
    Dr. Horta, do you have a thought at this point?
    Dr. Horta. Yes. Just to get back to your question about is 
there any grounds for optimism, are there some positive trends, 
I remember putting exactly that same question to my African 
colleagues in Chad and Cameroon. And the answer that I got was, 
``Of course.'' And the positive trends are the strengthening of 
civil society organizations in those countries, and sometimes a 
large project also helps to catalyze a civil society movement.
    What we need to take care with, of course, since it is a 
very fragile civil society still, is that large-scale lending 
does not contribute to undermining democracy. Moving large 
amounts of money is always also a political thing, and we can 
inadvertently, you know, just further entrench authoritarian 
regimes if you don't pay careful attention to the governance 
criteria that should be in place before carrying out this type 
of investment.
    The Chairman. Well, that's certainly good advice. I suppose 
the dilemma is, however, given the extraordinary amount of 
money involved in energy projects in particular, we are fated 
one way or another in this role to have a lot of cash. And the 
question then will be how the civil society progresses even in 
the face of a large amount of money, often in the hands of the 
governments, some better than others.
    Mr. Bapna, do you have a concluding comment for us?
    Mr. Bapna. Just a quick comment. We talked a lot today 
about the correlation between large, high-risk infrastructure 
and economic growth. Mr. Lowery, Secretary Lowery, mentioned 
that in the earlier panel as well.
    The Chairman. Yes.
    Mr. Bapna. And I want to make a point that not all growth 
is created equal. Some types of growth are much more pro-poor 
than others. And the question before the multilateral 
development banks, which have an explicit poverty mandate, is 
now to most effectively catalyze pro-poor growth and actually 
reduce poverty on the ground.
    This reminds me a bit about that old joke about economists, 
that we know that the ability of infrastructure to reduce 
poverty works in theory, but we are not yet sure that large 
infrastructure reduces poverty in practice.
    And in terms of the optimism, I do think there are reasons 
to be optimistic, and I think that if we can encourage the 
development banks to shift to more forcefully investing in 
smart infrastructure that has more direct and immediate 
benefits for the poor--these are oftentimes smaller, they are 
less costly, they are decentralized, but they are approaches 
that have been proven to work--and I think if we could do that, 
we would go a long way toward helping infrastructure reduce 
poverty.
    Thank you.
    The Chairman. Well, we thank each one of you for your 
testimony, and for your good counsel to the banks and to all of 
us, and to citizens all over the world who face the problems 
we're talking about today. We had two instances of two 
countries bearing the brunt of our scrutiny, but we also 
expressed our hopes for development in both cases and a new 
capacity to govern.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 11:45 a.m., the hearing was adjourned.]
                               __________

              Additional Material Submitted for the Record

 Letter From the Ambassador of Peru to the United States, Submitted by 
                        Senator Richard G. Lugar

                                           Embassy of Peru,
                                      Washington, DC, July 7, 2006.
Hon. Richard Lugar,
U.S. Senate, Hart Senate Office Building,
Washington, DC.
    Dear Senator Lugar: This letter is in regard to the hearing 
scheduled for Wednesday, July 12, 2006, at the United States Foreign 
Relations Committee, under your chairmanship, on the development impact 
of energy projects financed by multilateral development banks. One of 
the projects being considered in this hearing is the Camisea natural 
gas project, which began commercial operations in Peru in August 2004.
    I am confident that this brief letter will allow your committee to 
appreciate the enormous significance of the Camisea project for Peru, 
including the Liquefied Natural Gas (LNG) component, whose overall 
development without doubt is consistent with your vision on the need to 
stimulate partnerships in the western hemisphere, particularly among 
energy producers and consumers.
    As indicated, the Camisea project began operations in August 2004 
after a 3-year construction period. Undoubtedly, this has been the most 
important project ever developed in the history of Peru. Because of its 
economic significance, the project will not only help improving the 
standards of living for most Peruvians, but it will also strengthen 
Peru's democracy.
    Camisea has had a significant impact in the energy sector in Peru, 
since the gas is mainly used for domestic consumption at this first 
stage.\1\ The operating costs of the Peruvian main electricity grid 
have been reduced in approximately 30 percent. In addition, electricity 
user's savings--measured as the difference between the value of the 
electricity produced at its marginal cost with and without Camisea--
account for a net present value of US $3,371 million or 4.3 percent of 
our GDP. Moreover, Peru is now using a cleaner source of energy. A 
significant portion of the revenues, those generated by the royalties 
paid by the operating companies, are being transferred to the least 
developed and poorest areas of the country.
---------------------------------------------------------------------------
    \1\ Although the project was designed by the government to mainly 
help the development of the domestic market in Lima, there is a 
significant generation of export revenue since the liquids, which are 
extracted together for the gas, are totally exported.
---------------------------------------------------------------------------
    I would also like to emphasize that the Camisea project is crucial 
not only to the Peruvian economy but also to the energy security of the 
Latin America region. The LNG project currently being considered by a 
consortium of private investors, will allow the export of gas to Mexico 
and possibly to Chile, and will help reduce the oil dependence of many 
countries including the United States.
    In the recent Presidential elections, Peru has reaffirmed its 
strong commitment with both a more participative and inclusive 
democracy and a market economy. Peru needs the support of the United 
States and its allies to show to the international community that it is 
possible to have an open, market-oriented economy and reduce poverty in 
the context of democratic governance.
    Finally, I would like to express to you that the Government of 
Peru, with the support and assistance of the Inter-American Development 
Bank (IADB), has taken significant steps to improve the environmental 
and social aspects of the project. We are committed to continue 
monitoring the project to make Camisea a paradigm of clean, socially 
responsible infrastructure projects in the region.
    For your information, we are attaching to this letter specific 
information about the benefits of this project for Peru and the actions 
taken by the Government of Peru and the IADB to improve the 
sustainability of the project.
            Sincerely yours,
                                           Eduardo Ferrero,
                                                Ambassador of Peru.
                                 ______
                                 

                    Benefits of the Camisea Project

    From an economic point of view:

   The Camisea project is crucial for the development of Peru. 
        Net present value of the additional production value due to the 
        project, is calculated at US $5.5 billion (equivalent to 6 
        percent of Peruvian GDP).
   Government income due to taxes will increase US $1.4 billion 
        in net present value (representing 19.8 percent of the tax 
        income of the central government).
   Peruvian law requires that an important part of the income 
        generated by any project will remain in the area where the 
        natural resource was discovered. Therefore, the region of 
        Cusco, one of the poorest areas of Peru, will receive annually 
        approximately US $156 million, which is equivalent to US $911 
        million in net present value (more than 100 percent of the 2005 
        budget for the region of Cusco).
   Thanks to this project, more than 700 Km of roads and more 
        than 20 bridges have been improved in the poorest areas of 
        Peru.
   The energy deficit of Peru will be reduced by more than US 
        $500 million per year.
   More than 100 industries will replace liquid fuels by liquid 
        gas, improving the competitiveness of these industries and 
        using a cleaner source of energy.
   More importantly, 50 percent of the royalties arising from 
        the exploitation of Camisea return directly to the local 
        governments where the gas line passes by, like Cuzco, Ayacucho, 
        etc. This rate of return to the local communities is the 
        highest in Latin America.

    From a social point of view:

   The marginal cost of the energy in Peru will be reduced, on 
        average, 30 percent. This will bring major benefits to the 
        poorest people.
   The project has created, annually, more than 7,200 permanent 
        positions and more than 6,000 indirect jobs.
   A Special Development Fund has been created by Peruvian 
        Congress to promote the execution of developmental sustainable 
        projects in the zone of influence of the project.
   The Government of Peru has passed laws to protect areas 
        where indigenous communities, living in isolation, are located.
   Moreover, the Government of Peru has set basic health 
        centers in the area of influence of the project to take care of 
        the needs of the indigenous people, which had not previous 
        access to this service due to its remote location.

    From the environmental point of view:

   An Inter-Agency Commission has been created to monitor the 
        sustainable development of the Paracas Reserve, the only marine 
        reserve in Peru.
   A plan to revegetate was agreed to between the Government of 
        Peru and the sponsors of the project to preserve the species 
        and ecological balance in the area were the pipelines were 
        laid.
   The Special Development Fund will consider the preservation 
        of the environment as one criterion to evaluate the 
        sustainability of the project.
   The ability of the government to monitor the project in 
        remote areas has been strengthened significantly. The main 
        purposes of the measures are to address very old problems, 
        prior to the development of the Camisea project, like the 
        illegal and indiscriminate tree logging in the jungle; and to 
        preserve the intangibility of the area where indigenous 
        communities live.
                                 ______
                                 
 EXAMPLES OF SMART INFRASTRUCTURE PROJECTS FINANCED BY MDBS--SUBMITTED 
                            BY MANISH BAPNA

    India: Uttar Pradesh Rural Water Supply and Sanitation Projects.--
The project empowers village communities to make design choice and 
procure materials, services, and civil works. They are supported by 
NGOs that assist with community mobilization and private firms that 
provide technical design, inspection, and monitoring services. 
Investments in water supply and sanitation are complemented by programs 
promoting health awareness, women's development, and nonformal 
education. The project has achieved full cost recovery for operation 
and maintenance, and partial cost recovery for capital costs--major 
improvements over past practice in the Indian water sector. Recent 
evaluations of sustainability have shown that 92 percent of the water 
supply schemes and 100 percent of the latrines financed by the project 
are fully functional and in use by the beneficiaries.
    Brazil: Rural Poverty Reduction Program.--Community-driven 
approaches to development offer enormous potential for reducing poverty 
and improving lives, as shown by the Rural Poverty Reduction Program in 
northeast Brazil. The program has done a remarkable job of delivering 
basic infrastructure and services, supporting 55,000 small-scale 
investments--including 10,000 investments in water supply and 8,000 in 
electrification--in a region that contains Latin America's largest 
concentration of poor rural people. Just as important have been the 
program's effects on empowering communities, building social capital, 
improving governance, and reducing corruption. The program works 
directly with poor rural communities while leveraging the involvement 
of an increasingly broad range of public and private partners--
including municipal governments, nongovernmental organizations (NGOs), 
public and private service providers, and churches, to expand coverage, 
exploit special skills, and build constituencies. The core 
institutional mechanism is the community associations; they define, 
execute, operate, and maintain the investments from which they benefit, 
acting through decentralized, participatory municipal councils in which 
80 percent of voting power for approval of proposed investments rests 
with community representatives.
    Mexico: Large-Scale Renewable Energy Development Project.--The 
project aims to assist Mexico in developing initial experience in 
commercially-based grid-connected renewable energy applications by 
supporting construction of an approximately 101 MW IPP wind farm, while 
building institutional capacity to value, acquire, and manage such 
resources on a replicable basis. The global objective is to reduce 
greenhouse gas emissions by addressing and reducing the barriers to 
development of grid-connected renewable energy technologies and markets 
in Mexico.
    Indonesia: Kampung Improvement Project III.--Housing conditions and 
solutions vary widely from place to place in a large metropolitan area 
such as Jakarta. This UNDP/World Bank program attempted the difficult 
task of tailoring upgrading from site to site across a large city. To 
do so, they used community-based organizations (CBOs) as project 
initiators to encourage an active, innovative, and self-sustained 
community in which upgrading could take place. This program is 
considered to be one of the best urban poverty relief programs in the 
world for several reasons--one being the low level of investment needed 
per person (US $118 in Jakarta to US $23 in smaller cities), another 
being its sustainability. Since its inception in 1969, the concept has 
spread to 800 cities in Indonesia to benefit almost 30 million people 
and is among the best urban poverty relief programs in the world. The 
KIP program has had three phases. The first two concentrated on 
physical improvements and the third phase added a social/economic 
dimension to the equation by devoting 12 percent of the funding to 
economic development.
    India: Karnataka Community-Based Tank Management Project.--The 
project development objective is to improve rural livelihoods and 
reduce poverty by developing and strengthening community-based 
approaches to improving and managing selected tank systems. The project 
consists of three components: (1) establishing an enabling environment 
for the sustainable, decentralized management of tank systems; (2) 
strengthening community-based institutions to assume responsibility for 
tank system development and management; and (3) undertaking tank system 
improvements. The third component is further subdivided into: (a) 
improving the operational performance of selected tank systems through 
a menu of physical interventions identified and executed by local users 
and (b) facilitating technical training and on-farm demonstrations in 
water management, agriculture, and horticulture development, fisheries, 
forestry, and fodder production to help ensure that improved water 
storage and efficiency is translated into increased household incomes.
                                 ______
                                 

Annex 1.--Profiles of Large Infrastructure Projects Supported by MDBs--
                       Submitted by Manish Bapna

      CHAD-CAMEROON OIL PIPELINE (CHAD, CAMEROON/WORLD BANK, IFC)

    The $4.2 billion Chad-Cameroon Oil Development and Pipeline project 
is the largest private sector investment in sub-Saharan Africa and one 
of the most controversial in the history of the World Bank. The project 
involved the construction of a 1070 km pipeline from oil fields in 
southern Chad to the Atlantic Coast of Cameroon. Before the World Bank 
Group approved financing for the investment in 2000, local and 
international civil society organizations called for a moratorium on 
the project until minimum conditions of good governance, respect for 
human rights and capacity to manage the petroleum sector were in place. 
Instead, the bank group maintained that government capacity could be 
built in tandem with pipeline construction and that a law on the 
management of oil revenues would provide an adequate safeguard to 
ensure that petrodollars would be used for poverty reduction. Six years 
later, the project has not yet delivered its promised benefits; there 
is little evidence of any improvement in the lives of the poor in Chad 
and the country is in crisis. Pipeline construction was completed a 
year ahead of schedule and oil began to flow in 2003, while government 
capacity building projects in Chad and Cameroon lagged far behind. 
Then, facing mounting political instability in Chad, the government 
decided in January 2006 to amend the ``model'' revenue management law, 
stripping it of its strongest components in order to allow the 
government to use more of the oil revenues for military spending rather 
than poverty reduction, and eliminating a savings account for future 
generations. Meanwhile, in Cameroon, there remain significant 
outstanding concerns about environmental and social harm along the 
pipeline route, including failure to mitigate the spread of HIV/AIDS, 
loss of water sources, inadequate compensation for crops, and threats 
to the indigenous pygmy population. The experience of the Chad-Cameroon 
pipeline demonstrates how contingent development impacts are upon the 
will and capacity of host governments to protect the rights of their 
populations and harness revenues for poverty reduction. Recent events 
reveal the pitfall of failing to follow proper investment sequencing--
governance capacity first, investment second--and illustrate the risks 
for the poor inherent in a large-scale project built in absence of a 
solid foundation of public accountability and the rule of law.

   LESOTHO HIGHLANDS WATER PROJECT (LESOTHO, SOUTH AFRICA/WORLD BANK)

    The Lesotho Highlands Water Project (LHWP) is a huge interbasin 
water-transfer scheme comprising five proposed dams, 200 kilometers of 
tunnels blasted through the Maluti Mountains, and a 72-megawatt 
hydropower plant that will supply power to Lesotho. One of the world's 
largest infrastructure projects under construction today, the LHWP has 
been plagued by corruption scandals in recent years. The project's 
primary purpose is to transfer water from the tiny nation of Lesotho to 
Gauteng Province, the industrial heartland of South Africa. Water 
conservation (demand-side management) alternatives that would have 
allowed the postponement of the project's second dam were foregone, 
despite growing public concerns about the link between the costly LHWP 
and rising water rates for consumers in South Africa. Social and 
environmental impacts in the project area have been devastating to the 
local population. Over 20,000 people have moved into the area, greatly 
increasing the spread of communicable diseases such as HIV/AIDS. In 
addition, over 200,000 people were physically or economically displaced 
for the construction of the Khatse dam, the first stage of the large 
project. Replacement housing took years to complete and livelihood 
restoration efforts have been inadequate. Two of the five dams are 
already complete. Local communities are concerned that if remaining 
dams are constructed, thousands of acres of Lesotho's scarce arable 
land will be flooded. The land and livelihood loss, threats to food 
security and public health costs, as well as the impacts of water price 
increases on consumers in South Africa, underscore the failures of this 
large-scale scheme to address the needs of the poor.

                   CAMISEA GAS PIPELINE (PERU I IDB)

    The project involves the extraction, transportation, and 
distribution of natural gas for domestic consumption and export. 
Operations have only recently begun, so it is too soon to tell if the 
project is achieving its economic development objectives. However, its 
sustainability is already in question, on account of problems that 
start with the nontransparent project siting process and the lack of 
consideration of alternatives/opportunity costs. Camisea is based in a 
remote, ecologically fragile tropical area, the Lower Urubamba Valley 
of the Peruvian Amazon. High risks related to environmental degradation 
of pristine, high-biodiversity areas, and social impacts related to 
involuntary resettlement, the destruction of food and water supplies of 
local communities, and the exposure of voluntarily isolated indigenous 
peoples to illnesses for which they have no immunological defenses. 
Poor regulatory capacity has been seen in the Peruvian Government's and 
operating consortium's inability to deal with the consequences of 
multiple ruptures in the liquid natural gas pipeline, and earlier this 
year reports surfaced in the peruvian press of a possible conflicts of 
interest involving a top government official, who was a strong Camisea 
supporter despite having several compromising corporate entanglements.

                 MARLIN MINE PROJECT (GUATEMALA I IFC)

    The project involves the installation and operation of an open pit 
gold mine in the predominantly indigenous department of San Marcos, in 
the western highlands of Guatemala. Project selection took place in a 
highly nontransparent and nonparticipatory way, with apparently little 
consideration of alternatives/opportunity costs by the mine's owner, 
Canadian company Glamis Gold. High environmental risks relate to 
degradation of a dry, fragile ecosystem, pollution, and overuse of 
freshwater and other scarce resources. Social impacts include 
inadequate consultations and blatant disregard by Glamis and the 
Guatemalan Government of the culturally-influenced wishes of local 
people. The operation of the mine in the face of popular opposition has 
created the potential for violence and human rights abuses, but none of 
the principals involved--especially Glamis or the government--have 
shown much interest in or ability to defuse the situation by 
negotiating with the affected communities in good faith. Weak 
regulatory and planning capacity is evident in the government's 
consideration of a company proposal for mine expansion, even though 
none of the required impact assessments or community consultations have 
apparently taken place.

 YACYRETA HYDROELECTRIC PROJECT (ARGENTINA, PARAGUAY I WORLD BANK, IDB)

    The binational Yacyreta hydroelectric dam has been sponsored by 
both the World Bank and the IDB through numerous projects implemented 
over the last 27 years. Its main objective has been to generate least-
cost electricity to cover up to 40 percent of the energy demand in 
Argentina's urban centers, a goal it still has not been able to satisfy 
because the dam is operating below capacity. The Yacyreta reservoir was 
never impounded to the design level because of persisting delays 
relating to the mitigation of the original construction projects' 
numerous social and environmental impacts, including loss of 
biodiversity in the project area, degraded water quality, and loss of 
livelihoods resulting from the involuntary displacement and 
resettlement of over 50,000 people in urban areas. Weak capacity on the 
part of EBY, the binational entity undertaking the project, has been a 
chronic problem, and deficiencies in the overall governance and 
oversight frameworks for the original projects have led to 
implementation delays, cost overruns, allegations of corruption, and 
contractual disputes.

 BAKU-TBILISI-CEYHAN PIPELINE (AZERBAIJAN, GEORGIA, TURKEY I EBRD, IFC)

    The Baku-Tbilisi-Ceyhan (BTC) Oil Pipeline, which has been built 
with the aid of financing from the IFC and the EBRD, is planned to 
transport up to one million barrels of oil per day from the Caspian Sea 
through Azerbaijan, Georgia and Turkey. Local groups and international 
NGOs have objected to the project on several grounds:

   The banks approved the project without clear guidelines on 
        how adversely affected local landowners would be compensated or 
        resettled;
   The pipeline runs through an earthquake-prone region, 
        putting it at risk to damage and severe environmental 
        pollution;
   The pipeline crosses the watershed of the Borjomi national 
        park, an area of Georgia famous for its mineral water springs 
        and natural beauty, thus threatening the livelihoods of people 
        in the region;
   Arrangements for using the revenues from the pipeline are 
        not transparent, and corruption is a serious concern in parts 
        of the region.

        K2R4 SAFETY AND MODERNIZATION PROGRAMME (UKRAINE I EBRD)

    The Ukrainian nuclear reactors Khmelnitsky 2 and Rivne 4, often 
referred to as K21R4, were completed and modernized with the help of 
financing from the EBRD and Euratom in 2004. EBRD participated in 
financing the projects despite concerns about: safety (the reactors are 
based on risky Soviet-era designs); high costs (an independent panel of 
experts contracted by EBRD to review the economics of the project 
concluded that completing the reactors was not the most productive use 
of the EBRD's money); and complaints that the decision-making process 
was nontransparent and undemocratic (there was little evidence of 
popular support, but much evidence of lobbying by companies that 
supplied nuclear technology to the projects).

      SAMUT PRAKARN WASTEWATER MANAGEMENT PROJECT (THAILAND I ADB)

    The Samut Prakarn Wastewater Management Project Samut Prakarn was 
conceived by the Government of Thailand in the early 1990s to address 
the severe water pollution problems in Samut Prakarn Province. The 
project was originally designed to comprise two treatment plants in an 
industrial zone. The plant design and location were subsequently 
changed by the private contractor to include a single plant in the 
fishing village of Klong Dan, a location 20km east of the industrial 
zone. ADB Management treated this departure from approved plans as a 
routine matter and failed to conduct additional studies or seek 
approval from its board. Under the changed site and design, the project 
(now on hold due to an ongoing corruption investigation by the Thai 
Government) poses adverse environmental and social impacts that will 
affect 60,000 villagers living near the project location, most of whom 
only found out about the project when construction started. Local 
communities allege that corruption was involved in the purchase of land 
for the project as it was bought at an artificially high price and all 
17 plots comprising the project area were sold by a single company at 
exactly the maximum price allowed under the contract; this suggests 
collusion between buyer and seller. Affected communities filed an 
inspection case at the ADB whose findings confirmed that the ADB had 
violated its own policies during project preparation and 
implementation. The Thai Government investigations have corroborated 
the corruption charges leveled by the community and have uncovered 
additional evidence. ADB's involvement in the project did not prevent 
corruption from arising; instead of assessing and minimizing corruption 
risks in a project in a country which at the time was ranked among the 
most corrupt countries in the world, ADB abdicated its oversight 
functions to the ``turn-key'' contractor and its Special Review Mission 
of 2000 dismissed evidence of corruption. The ADB Office of Auditor 
General never conducted an internal investigation and argued that as 
the land transactions were being investigated by the Thai Government, 
it limited its review to the wholly separate issue of an alleged 
conflict of interest involving a key ADB staff member on the project. 
The ADB to date has not responded to the allegations of corruption 
raised by the Klong Dan community in a satisfactory and straight 
forward manner.

               MUMBAI URBAN TRANSPORT PROJECT (INDIA IWB)

    The US $945 million MUTP, which includes a US $542 loan from the 
Bank, began in 2002 and was designed as a first and urgent step towards 
improving physical infrastructure in rail and road transportation. With 
more than 100,000 people to be resettled to make way for the 
infrastructure improvements, MUTP is among the largest urban 
resettlement projects supported by the Bank in the world. Claiming that 
the WB had violated its own policies and procedures, three 
organizations representing affectees submitted a claim to the WB 
Inspection Panel in 2004. The panel's findings, approved by the board, 
found that even though affectees were originally living in squalid 
conditions, the Bank violated its resettlement policy by not ensuring 
their income/livelihoods and physical environment were improved in the 
resettlement sites; sites lacked access to water and sewerage and did 
not cater to the specific business/trade needs of the affectees. The 
Bank management suspended loan disbursement in March 2006 to bear 
pressure on the executing agency to comply with Bank policies; the 
response from the executing agency was one of defiance and the Bank 
resumed lending in July 2006 even though the head of the executing 
agency claims it has not changed its resettlement practice and that it 
has in fact forced the WB to change its policies. Progress reports from 
both Bank management and the inspection panel are due September 2006.

         NAM THEUN 2 HYDROELECTRIC PROJECT (LAO PDR I WB, ADB)

    In April 2005, the World Bank and Asian Development Bank, 
respectively, approved up to $270 million and $120 million in loans and 
risk guarantees for the 1,070 megawatt Nam Theun 2 Hydropower Project 
in Laos, following nearly a decade of discussion. This came despite a 
number of concerns raised by various civil society groups relating to 
the significant environmental and social costs, inadequate 
consultations with project affected persons on the design and 
mitigation measures of the project, lack of revenue management 
oversight, and presence of other least-cost options. Nam Theun 2 is the 
first major dam to be supported by the World Bank since it announced 
its intention to ramp up lending for large dams and other ``high-risk'' 
infrastructure projects. In a country where civil liberties and free 
speech are severely restricted, independent oversight of the project's 
progress cannot be assured, Construction has already begun.and while 
the NT2 revenues will account for only 3 to 5 percent of total revenues 
for Laos from 2010 to 2020, the project is expected to displace 6,200 
indigenous people and impact more than 100,000 villagers who depend on 
the Xe Bang Fai River for fish, agriculture, and other aspects of their 
livelihood. WB has already reported on the delays in the implementation 
of environmental and social programs and independent reports from the 
site suggest the resettled villagers are having difficulty adjusting to 
their new ``settled'' lifestyles and cropping patterns. Concerns about 
the capacity of the private consortium and the Lao government to abide 
by WB and ADB policies, and the ability of WB and ADB to implement 
their policies remain.

        SOUTHERN TRANSPORT DEVELOPMENT PROJECT (SRI LANKA I ADB)

    The Southern Transport Development Project (STDP), approved in 
November 1999, involves the construction of a 128-km expressway linking 
Colombo with Matara in the south. The Asian Development Bank (ADB) has 
provided a loan of $90 million from the concessional Asian Development 
Fund to finance the southern 61-km section from Kurundugahetekma to 
Matara, construction of which is currently ongoing. Japan Bank for 
International Cooperation (JBIC) is financing the northern 67-km 
section, and the government is financing the balance. Local groups are 
most concerned about the significant alteration of the original road 
alignment, as identified in the ADB-financed feasibility study, without 
the requisite due diligence and without the approval of the ADB Board 
of Directors. This alteration has resulted in a host of problems 
including increased number of people to be resettled, poor facilities 
in the resettlement ``villages, lack of attention to economic and 
social rehabilitation of oustees, lack of participation, information 
and transparency, environmental degradation, and disturbance to social 
networks and structures.'' The ADB's independent compliance review 
panel accepted a case from affectees in 2004 and its investigations 
have confirmed the ADB failed to implement its policies or provide 
adequate supervision, which led to the above impacts. The CRP's 
findings have been accepted by both ADB board and management but 
remedial measures by management are behind schedule.
                                 ______
                                 

Responses of Hon. Clay Lowery to Questions Submitted by Senator Richard 
                        G. Lugar for the Record

                                CAMISEA

    Question. What concerns did the United States raise at the board 
meetings on Camisea? Could you please provide a copy of the United 
States Executive Director's board statement on Camisea?

    Answer. The United States was the only board member not to support 
IDB financing of the Camisea project due to concerns about the IDB's 
financial additionality and the project's compliance with our 
environmental standards.
    Prior to the board vote, the United States was instrumental in 
incorporating many loan conditions to strengthen the project's 
environmental and social protections.
    The Camisea project has not come back for the board to consider 
additional financing since it was initially approved. There have, 
however, been some IDB management briefings to the board on the status 
of the project, especially at the point of financial closure and 
disbursement.
    Regarding Peru LNG (Camisea II), on July 26, an IDB mandate letter 
was signed (giving a green light for IDB appraisal to proceed), and 
United States Ex-Im Bank has received an application from Hunt for 
financing. Hunt is currently engaging in various preconstruction 
activities on its LNG site and in the gas fields. Hunt has created a 
relatively detailed project Web site, as has the IDB. On September 8, 
IDB held a civil society meeting on Peru LNG to discuss and generate 
recommendations regarding the environment and social strategy and 
continues to hold biannual civil society meetings on Camisea I.
    Please find attached a copy of our board statement from 2003 on 
Camisea I. (This information appears at the end of this question and 
answer section.)

                         CHAD-CAMEROON PIPELINE

    Question. How did the United States vote on the Chad-Cameroon gas 
pipeline when it first came to the executive board of the World Bank? 
What concerns did the United States raise at the board meetings on 
Chad-Cameroon? Could you please provide a copy of the United States 
Executive Director's board statement on Chad-Cameroon?

    Answer. After extensive discussions with the World Bank, other 
shareholders, and a wide variety of other interested groups, and after 
securing substantial improvements and safeguards on a range of key 
issues, the United States agreed to support the pipeline project. The 
United States was concerned about the risk of misuse of funds and the 
weaknesses in capacity that have long defined the Chadian state, so it 
sought ways to mitigate the role that large inflows of funds would have 
on the fragile economy. The United States, however, recognized the vast 
potential for revenue generation and growth that the pipeline 
presented, so it wanted to find ways to ensure that the project 
benefited a broad segment of Chadian society. To mitigate potential 
risks, the United States and other donors insisted on the creation of 
the revenue management supervisory board (known as the college) and 
strengthened treatment of environment and social issues. These changes 
were necessary to ensure that oil revenues were directed effectively 
toward poverty reduction and economic growth activities. While 
supporting the project, the United States recognized there were still 
significant implementation challenges that would require regular 
monitoring by the World Bank, NGOs, and concerned shareholders.
    Key to the United States' support of the pipeline financing itself 
was the United States' support of related World Bank loans to help 
build Chad's institutional capacity in petroleum revenue management and 
to strengthen Chad and Cameroon's abilities to manage environmental and 
social issues related to this project. The United States has long-
believed that the pipeline project will not sustainably reduce poverty 
if there are not simultaneous improvements in governance and capacity-
building in Chad.
    Please find attached a copy of the United States' position on the 
Chad-Cameroon pipeline from 2000. (This information appears at the end 
of this question and answer section.)

    Question. On what date did the Treasury Department receive 
notification about the World Bank's agreement with Chad that was 
announced on July 14, 2006? What is the Treasury view of this 
agreement? Is it a positive step forward or is it going to avoid 
scrutiny of the windfall of petrodollars that are not covered by the 
agreement?

    Answer. Treasury received notification of the agreement on July 14, 
2006. Treasury was aware that a high-level Chadian delegation was in 
Washington, DC, the week of July 10 to negotiate an agreement with the 
World Bank and received periodic updates from Bank staff throughout the 
week on the negotiations. Treasury also spoke with Chadian Ambassador 
Bechir that week to discuss the status of the negotiations. At the time 
of my testimony before the Senate Foreign Relations Committee, however, 
we did not know the outcome of those negotiations.
    After we received the notification of the agreement, Treasury 
requested additional background information from World Bank staff. 
Based on that, we understand the agreement, signed July 13, was the 
outcome of a long negotiation and includes some compromises on both 
sides. The Chadian authorities agreed that a large portion of their 
total revenue needs to be dedicated to fighting poverty, and that they 
must improve transparency and accountability in economic management. 
The original Petroleum Revenue Management Law (PRML) stipulated a 
strict allocation of only the direct oil revenues and only from four 
oilfields of the Doba fields. These direct oil revenues were allocated 
among the Fund for Future Generations (10 percent), the priority 
sectors (72 percent), the local authorities in the oil producing 
regions (4.5 percent), and the current expenditures of the budget (13.5 
percent). Under the new Memorandum of Understanding, for the 2007 
budget, 70 percent of all revenues (regardless of source as opposed to 
only direct oil revenues from the four Doba fields under the PRML) are 
to be devoted to poverty reduction spending programs. These programs 
specifically include expenditures on education, health and social 
affairs, infrastructure, rural development, and governance (e.g., 
justice, anticorruption, and decentralization). There is no requirement 
under the new agreement that funds be automatically deposited in a Fund 
for Future Generations. If total revenues exceed the annual 
expenditures agreed in the Medium Term Expenditure Framework, the 
excess is to be deposited into a stabilization fund for future 
availability. As the rules that guide the use of that stabilization 
fund are developed, the international community will need to watch 
carefully to ensure that appropriate safeguards are developed. The 
Memorandum of Understanding will remain in force until the completion 
of an updated Poverty Reduction Strategy Paper, which will provide the 
basis for the 2008 budget.
    Although the changes are substantial, they still broadly provide 
that a high volume of new revenues will be dedicated to critical 
priority spending needs. In essence, Chad has committed to improve the 
transparency and accountability of its overall budget process, 
including the collection and expenditure of all direct and indirect oil 
revenues from all oil fields, in exchange for broadening the definition 
of priority programs and eliminating the Fund for Future Generations. 
For example, Chad has agreed on a framework to modernize public 
finances, to audit its oil revenue accounts, and to strengthen the 
college, which will maintain its oversight of the use of oil revenues. 
Finally, the agreement ensures that the World Bank still has a legal 
framework to support the Government of Chad's pro-growth and poverty 
reduction programs, and to insist on strong oversight.
    We will continue to engage with World Bank staff regarding the 
implementation of the MOU covering Chad's 2007 budget. Similarly, 
Treasury has supported the GOC's transparent management of its oil 
revenue. The Office of Technical Assistance has provided oil revenue 
allocation, expenditure control, and procurement assistance to the 
college since 2001. Until recently, a resident budget advisor has been 
helping the college cope with its increased work load and 
responsibilities under the new oil revenue regime. However, that 
program has been suspended temporarily due to security concerns.

                            TREASURY ACTIONS

    Question. In testimony before Congress in March 2006, you indicated 
that although Treasury does not have an estimate of the share of World 
Bank lending that is lost to corruption, no loss of funds is 
acceptable. Given that tighter controls typically imply both larger 
administrative costs and slower disbursements, does Treasury see any 
trade-offs between implementing programs and keeping administrative 
overhead low, on the one hand, and combating corruption, on the other? 
Or are they truly not goals that are at odds? What is Treasury's 
perspective about this?

    Answer. We do not view the trade-off as one between 
``administrative'' costs associated with stronger oversight and funds 
available for projects. The real trade-off is between funding lost to 
corrupt and/or ineffective projects and funding available for the 
implementation of effective projects that deliver real benefits to the 
citizens of borrowing-member countries. That trade-off is not a 
difficult choice, and we do not see the particular goals of strong 
oversight and effective project implementation as being at odds with 
one another.
    Also, it is not clear to us that administrative, or oversight, 
expenses will increase if, overall, the Bank effectively tailors its 
programs and projects to the risks in each country. To the extent that 
expenses associated with stronger oversight do increase, however, they 
will be used to help ensure that projects deliver the intended benefits 
and are not lost to corruption or generally wasted, providing an 
overall net benefit.

    Question. The World Bank does not have a truly independent audit 
committee or employ outside auditors to objectively evaluate project 
performance. In light of Sarbanes-Oxley and the acknowledged benefits 
of true independence in auditing, does Treasury believe that any 
changes are required in the evaluation/auditing functions of the World 
Bank or other multilateral development banks?

    Answer. We believe that the World Bank Group's current division of 
evaluation/auditing responsibilities is appropriate and will push--as 
needed--to strengthen these oversight functions in all the MDBs. At the 
World Bank, these evaluation/auditing functions are performed by a 
private sector audit firm, the Independent Evaluation Group, and the 
Internal Audit Department (IAD). Strong oversight of the auditing/
evaluation functions is currently exercised by the board of executive 
directors of the World Bank Group, through the Board's Audit Committee 
and the Board's Committee on Development Effectiveness.
    First, concerning the audit of MDB financial statements, all the 
MDBs have their financial statements audited by internationally 
recognized private sector audit firms. For example, the World Bank 
Group's current auditor is Deloitte & Touche (D&T).
    Second, with regard to project performance, the World Bank Group's 
Independent Evaluation Group (IEG) is widely respected for its 
evaluation of Bank projects and programs. The IEG reports directly to 
the executive board--not to senior management or the President. The 
IEG's budget and work plan are discussed and approved by the executive 
board. The head of IEG can only be hired or removed with the consent of 
the board. We have been pushing at all the regional MDBs to put in 
place a strong independent evaluation function modeled on that of the 
World Bank. We are making progress, but there is more to do.
    Third, we want to assure you that the World Bank Group has a strong 
and effective Internal Audit Department (IAD). IAD is playing a key 
role in strengthening internal controls, the efficiency and 
effectiveness of operations, and the management of trust funds. IAD's 
work program and results of its audits are discussed with the President 
and with the board's audit committee. IAD meets quarterly with the 
audit committee in executive sessions (without management present). 
There are ongoing discussions about the role of the audit committee in 
the hiring and removal of the auditor general. Currently, the audit 
committee is ``consulted.'' We are pushing for ``concurrence'' which 
would enhance the audit committee's role.
    We have been working with our executive directors in all of the 
regional MDBs to strengthen the role of internal audit in each 
institution.

    Question. What process is in place to include external 
consultation/public comment in the World Bank's anticorruption strategy 
which is expected to be submitted by management to the executive 
directors toward the end of summer and to the development committee at 
the annual meetings this fall?

    Answer. The World Bank Governance and AntiCorruption Strategy was 
officially presented to the joint IMF/World Bank Development Committee 
this past September at the annual meetings. In advance of these 
meetings, the Bank posted the strategy paper on its Web site, inviting 
public comment, and Bank management held consultations with other 
multilateral development banks, the IMF, and a number of other NGOs and 
outside observers.
    Following the development committee meeting, and at the urging of 
Treasury and our Executive Directors Office, Bank management held more 
extensive consultations. These consultations were held with a wide 
range of stakeholders in more than 40 developing countries, as well as 
with donor country governments, Bank staff, and outside observers. In 
addition, Bank management continued to solicit public comment on the 
World Bank Web site. Consultations concluded on January 26, and Bank 
management provided an informal summary of the results on January 30. 
Management intends to return formally to the board in March (and to the 
development committee in April) with detailed plans on how it intends 
to operationalize the strategy. We will continue to work with 
management to ensure effective implementation.

                             INFRASTRUCTURE

    Question. Which of the five multilateral development banks are 
expected to focus on infrastructure as part of their strategy going 
forward? How are they implementing the infrastructure strategy? Does it 
vary by bank? If so, how?

    Answer. All of the development banks are intensifying their support 
for infrastructure through direct financing, capacity building, and 
analysis, and policy reform. Specifically:

   The World Bank, in 2003, adopted an infrastructure action 
        plan to revitalize its infrastructure operations, which had 
        been declining. Demand has been strong, and Bank lending for 
        infrastructure has increased by about $1 billion per year.
   African Development Bank President Kaberuka recently 
        reasserted the importance of infrastructure to Africa's growth 
        and regional development. The AfDB has also been increasing its 
        support for infrastructure in Africa, including urgently needed 
        water resources development.
   Infrastructure has been a consistent focal area of the EBRD. 
        The EBRD's Municipal and Environmental Infrastructure (MEI) 
        Operations Policy guides the Bank's operations in each of the 
        main subsectors (water and wastewater, urban transport, solid 
        waste management, and district heating).
   At the Asian Development Bank, infrastructure accounted for 
        60 percent of lending in 2005. In 2005, the AsDB, in 
        collaboration with the World Bank and Japan, issued a blueprint 
        for meeting Asia's large infrastructure challenges.
   Between 1995 and 2005, the Inter-American Development Bank 
        provided $8.4 billion in loans for infrastructure, increasingly 
        to the private sector. Since its inception in 1994, the IDB's 
        Multilateral Investment Fund has made more than 100 grants 
        totaling $87 million to support legal and regulatory reform, 
        privatization of utilities, sector restructuring, and 
        institutional strengthening. IDB President Moreno has cited 
        infrastructure as one of the IDB's priorities for the region.

    Given their own resource constraints, the development banks are 
placing higher importance on coordination with other donors and 
leveraging private sector resources. The African Development Bank, for 
example, has established an infrastructure consortium to coordinate the 
work of donors and African countries. Several banks have set up special 
facilities to help countries mobilize capital for infrastructure, such 
as the African Development Bank's infrastructure project preparation 
facility. Similarly, the IDB approved a facility intended to help 
catalyze private sector investment in infrastructure in the region.

    Question. How are the lessons learned in the January 30, 2006 World 
Bank publication ``Scaling Up Infrastructure: Building on Strengths, 
Learning From Mistakes'' being integrated into the infrastructure 
projects financed by the other multilateral development banks?

    Answer. The World Bank has described five lessons in ``Scaling Up 
Infrastructure'' for its future efforts in the infrastructure sector:

    1. Projects need to balance economic growth with access for the 
poor.
    2. The entire range of public-private solutions must be considered.
    3. Project design should address social and environmental impacts 
from the initial phases.
    4. Projects must clearly address the potential for corruption.
    5. The World Bank cannot neglect the basics of good technical 
designs, economic analyses, and implementation arrangements.

    These lessons have coincided with a major shift in World Bank 
infrastructure operations. For example, World Bank projects 
increasingly seek to expand access and target service delivery to the 
poor, and the World Bank has stepped up efforts to address corruption. 
The Bank has launched a pilot program to sharpen its risk analysis for 
infrastructure projects, and develop triggers to identify and address 
problems quickly when they arise.
    All the development banks have adopted environmental and social 
safeguard policies, some of which have been strengthened under U.S. 
pressure. Treasury closely monitors the application of these policies.
    The development banks, also under U.S. leadership, have 
strengthened their results frameworks, although more work is needed to 
ensure consistent implementation and greater selectivity. The banks 
also continue to face disbursement pressures, something we have been 
fighting. Pressure to lend can undermine performance in all sectors, by 
emphasizing volume over quality.
    The banks, through their private sector windows, engage private 
partners in infrastructure projects and seek to structure 
infrastructure projects in a commercial manner to ensure quality, 
efficiency, and financial viability.
    We will continue to monitor MDB policies and operations to see that 
they reflect the lessons of experiences and best practices.
                                 ______
                                 

 Responses of Hon. Clay Lowery to Questions Submitted by Senator Paul 
                        Sarbanes for the Record

    Question. It is my understanding that the United States has 
arrearages to the Multilateral Investment Fund (MIF) of nearly $27 
million, and to the Inter-American Investment Corporation (IIC) of 
about $46 million. Why has the Treasury Department not sought, in its 
fiscal year 2007 budget request, any payment at all toward reduction of 
those arrearages?

    Answer. For the fiscal year 2007 budget, the administration 
requested $1.329 billion for scheduled annual commitments to the 
multilateral development banks, including $25 million for the first of 
six payments to the first replenishment of the Multilateral Investment 
Fund (MIF-II). Fully funding the budget request will prevent arrears 
from rising further, and we are concerned that only $15 million has 
been provided to the MIF by the Senate Appropriations Committee in 
action to date. In fact, the Continuing Resolution (P.L. 109-289) will 
have the effect of only providing $1.7 million for the MIF, thus adding 
substantially to our arrears. The administration is also requesting 
authorization for the United States contribution of $150 million to the 
MIF-II replenishment.
    The administration did not seek funding for arrears in the fiscal 
year 2007 budget request. The request is based on what the United 
States has pledged in replenishment negotiations to the respective 
institutions. We are seriously concerned about the growing arrears to 
these institutions and continue to stress the importance of fully 
funding the fiscal year 2007 request to stop the trend of rising 
arrears.

    Question. Are any of the other shareholders to these institutions 
in substantial arrears?

    Answer. The United States is the largest contributor to the Inter-
American Investment Corporation (IIC), having subscribed to $125 
million of shares in the most recent capital increase of $500 million. 
U.S. arrears of $46 million are the highest among the eight countries 
which are in arrears on capital payments to the institution. 
Argentina's arrears to the IIC are the next highest at $34 million.
    The United States is the largest contributor, along with Japan, to 
the Multilateral Investment Fund (MIF) and is the only country in 
arrears. The U.S. voting power in the MIF is currently 32.5 percent and 
upon completion of U.S. contributions of $150 million to the MIF-II 
replenishment, our voting power will increase to 39.3 percent if our 
pledge is fully funded.

    Question. Are we in danger of losing our vote at the IIC? If we 
lost our vote, what would be the impact on IIC policy directions and 
operations?

    Answer. The United States will not lose its vote at the IIC and 
remains the major shareholder with 24.17 percent of voting power. 
However, because of our arrears, the United States does not control the 
25 percent of voting power required to block a voting quorum. U.S. 
influence has thus been weakened in that the United States alone cannot 
now block board approval of a project or policy.

    Question. Are there any areas in which the United States has met 
resistance to our positions within the MDBs because of our status as a 
debtor? Would the United States be in a strengthened position to press 
for reforms at the MDBs if we were up to date in our dues?

    Answer. Yes. The United States pursues an aggressive reform agenda 
in all of the multilateral development banks (MDBs). While we often 
encounter resistance to our reform proposals, we have still achieved 
good overall results in recent replenishments (IDA-14, AsDF-9, AfDF-10, 
MIF-II, IFAD-7, and GEF-4). Continuing arrears, however, weakens our 
leadership and influence and prevents us from meeting commitments as 
scheduled. For example, if IDA is not fully funded in fiscal year 2007, 
then the United States could be prevented from meeting the President's 
commitment to the landmark Multilateral Debt Relief Initiative (MDRI) 
as scheduled. In essence, many countries believe that the United States 
is trying to achieve significant reforms without paying for them in a 
timely manner. For instance, this has harmed our efforts in providing 
debt relief to Liberia. However, we continue to fight for sound reforms 
to achieve even better results in the MDBs.

    Question. Total U.S. arrearages to all the MDBs have risen by 
nearly two-thirds over the past 6 years, from $451 million in fiscal 
year 2000 to an anticipated year-end total of $739 million in fiscal 
year 2006. Do you regard this as a serious problem? What steps is the 
administration taking, and at what levels, to deal with the growing 
arrearages? Since the administration is now about to begin the process 
of developing a budget for fiscal year 2008, will the Treasury 
Department propose a plan for paying off those arrearages?

    Answer. Yes, rising arrears are a serious concern and undermine the 
U.S. leadership position in the MDBs, which makes it critically 
important that Congress fully fund the fiscal year 2007 request of 
$1.329 billion so that arrears do not further increase. Arrears were 
taken into consideration in developing the budget request for fiscal 
year 2008, and the President's fiscal year 2008 budget includes a 
request for $175 million toward payment of U.S. arrears to the MDBs.
                                 ______
                                 

 Responses of Hon. Jaime Quijandria to Questions Submitted by Senator 
                    Richard G. Lugar for the Record

    Question. Have you had any professional relationship with the 
Camisea project companies?

    Answer. I was a short-term consultant for TGP, one of the partners 
of the Camisea project. When I was appointed Minister of Energy and 
Mines, the contract was canceled by mutual agreement. The public 
opinion in Peru was aware of that because on July 29, 2001, when I 
became Minister of Energy and Mines, I made a public statement 
mentioning the list of companies, international organizations, and NGOs 
that hired my professional services in the previous 5 years. A copy of 
this statement was sent to the most important newspapers in Peru. This 
was the first time that an incoming minister made this kind of 
disclosure prior to taking office.

    Question. How, if at all, should the Camisea project be adjusted to 
maximize benefits for the people of Peru and minimize impacts on the 
indigenous peoples and the environment?

    Answer. As mentioned in my statement, there are some 
recommendations put forward in the ombudsman's report on Camisea that 
deserve to be discussed and, if accepted by all the parties involved, 
eventually implemented before starting the second phase of the project. 
The main recommendations are as follows:

   Approve specific regulations to effectively protect the 
        rights of the indigenous populations in isolation and at first 
        contact;
   Determine assessment criteria that ensure fair compensation 
        for the damages caused;
   Design and implement mechanisms that ensure fair 
        negotiations and technical assistance to the indigenous 
        communities;
   Modify the current legislation on right of way;
   Intensify the state control over the environmental and 
        social commitments undertaken by the companies involved;
   Strengthen the performance of technical and 
        multidisciplinary inspections of the works that the project 
        entails; and
   Extend the period between the release of the studies on 
        environmental impact and the public hearings.

    In sum, it is not a matter of ``adjusting'' the Camisea project but 
of introducing additional safeguards deemed necessary according to the 
experience gained during the execution of the first phase.

    Question. In your oral remarks, you mentioned Nam Theum 2 project 
that is before the World Bank. Why do you think that the project has 
been delayed? How do you assess the argument that there are a number of 
issues that need to be addressed with the project before it moves 
forward?

    Answer. The potential for hydropower development on the Nam Theum 
system in Central Lao People's Democratic Republic (Lao PDR) was first 
identified by the Mekong Secretariat in the 1970s. The studies 
undertaken by the Government of Lao PDR identified a series of 
potential sites for hydropower development of the Nam Theum, which were 
given numbers for reference purposes, including the Nam Theum 2 site. 
In 1991, following initial studies, the Government of Lao PDR, with the 
support of the World Bank and the United Nations Development Program, 
commissioned the Snowy Mountain Engineering Corporation to undertake a 
feasibility study for the Nam Theum 2 Hydroelectric Project. Since 
1994, and with the support of the Asian Development Bank (ADB), the 
French Agency of Development, the World Bank, and the Government of Lao 
PDR, the Nam Theum 2 Electricity Consortium has been responsible for 
the project design. In January 2004, the responsibilities of Nam Theum 
2 Electricity Consortium to develop the project were transferred to Nam 
Theum 2 Power Company Limited (NTPC), which is wholly owned by four 
companies: Electricite de France International (35 percent), 
Electricite du Laos (25 percent), Electricity Generating Public Company 
Limited (25 percent), and Italian-Thai Development Public Company 
Limited (15 percent). Finally, on March 31, 2005, the executive 
directors of the World Bank approved an IDA grant to the Lao PDR, an 
IDA partial risk guarantee for a syndicated commercial loan to and 
equity investment in the Nam Theum 2 Power Company Limited for the Nam 
Theum 2 Hydroelectric Project.
    The project will dam the Nam Theum River, supplying the Electricity 
Generating Authority of Thailand with 1,070 megawatts (MW) of 
electricity. It is forecast that the project will generate 
approximately $1.9 billion in revenues for the government over a 25-
year projected concession period. The project is expected to be one of 
the largest sources of foreign currency income for the government over 
its lifetime, a very important contribution to the Lao PDR's gross 
domestic product, and a significant source of fiscal revenues after 
repayment of the country's commercial debt. Also, the project is 
recognized by the government as an essential part of the country's 
development framework to reduce poverty.
    It is a huge project. The cost is estimated at about $1.2 billion. 
In a country like Lao PDR--with fewer than 6 million people--it is an 
enormous project. Its cost is equivalent to about 80 percent of the 
country's total GDP. It is for this reason that the project has 
attracted a lot of international attention.
    In its evaluation, the World Bank views Nam Theum 2 as much more 
than a hydroelectric project. A detailed assessment was carried out 
taking into consideration all the potential costs and benefits--not 
only from a technical and economic perspective, but also from broader 
social and environmental perspectives.
    According to the Joint World Bank-ASEAN Development Bank Report, 
``the project has commenced well, but work still needs to be done to 
effectively manage risks and mitigate impacts in the area of 
environmental and social safeguards, and synchronize these actions with 
construction momentum. This will require more effective measures to 
build capacity, strengthen implementation, improve coordination with 
Lao PDR, and streamline coordination and communications between them. 
With good progress in tunneling work and significant reduction in 
geological risks, the project is unlikely to face delays or cost 
escalation, provided the implementation agencies accelerate 
implementation of resettlement and mitigation of environmental impacts, 
and ensure the construction and safeguards measures in tandem.'' \1\
---------------------------------------------------------------------------
    \1\ Lao PDR: Nam Theum 2 Hydroelectric Project Update, The World 
Bank, March 31, 2006, p. 3.
---------------------------------------------------------------------------
    In sum, the evaluation and approval of the Nam Theum 2 by the World 
Bank and other IFIs have taken more than 10 years, with a total cost of 
almost $10 billion, which largely exceeds the total aid received by Lao 
PDR from IFIs. The delay was due, in the first place, to the complexity 
and size of the project and the reputational risk involved in the 
operation. There was also strong opposition from NGOs (Friends of the 
Earth--Japan, Terra, and others). At present, the project is under 
construction and there are actions to be taken by the implementing 
agencies of the Lao PDR in order to ensure a successful implementation.
    Last but not least, the people of Laos themselves have expressed, 
in a series of independent consultations, their desire for the project 
and the benefits it will bring. It is important to see this project in 
a balanced and informed way. For example, the project will flood a 
badly degraded area, but it will also ensure that a pristine forest 
area nine times larger is preserved. It will require the relocation of 
6,200 people, but it will provide them with improved housing and higher 
incomes. It is a major project in a country with limited capacity, but 
a large number of steps have been taken to help strengthen the 
government's capacity.
    It should not come as a surprise that single-interest lobby groups 
which oppose all dams, have also opposed this project. But what they 
fail to offer is a viable alternative. Nam Theum 2 is certainly not a 
perfect project--perfect projects do not exist anywhere. Nor is it free 
from controversy--no dam is. But it is a serious, widely supported 
proposal to help some acutely poor people, to give them a chance to 
make a decent living and be able to feed and educate their children.

    Question. You also mentioned the Chad-Cameroon Pipeline in your 
oral comments. Have the Governments of Chad and Cameroon and the World 
Bank implemented adequate safeguards to ensure that the revenues 
generated from the pipeline are used correctly, that compensation is 
distributed fairly, and that environmental impacts are mitigated?

    Answer. The most critical and challenging issue faced by the Chad-
Cameroon project was the implementation of the Petroleum Revenue 
Management Program (PRMP) and the decision of the Government of Chad to 
amend the Petroleum Revenue Management Law (PRML). The PRMP was 
designated to maximize the poverty-reducing impact of petroleum 
revenues for the Chadian population, and it was a fundamental and 
contractual element of the World Bank's support to the project. The 
World Bank consequently viewed any needed changes to the PRMP as a 
process to be undertaken and agreed upon mutually and after careful 
consideration. When the Government of Chad initially raised the issue 
of revising the PRML to respond to financial difficulties, the World 
Bank suggested using the entire flexibility of the existing law and 
implementing the PRMP for a full budget cycle so that a comprehensive 
assessment could be made to guide potential changes.
    The government, without consulting the World Bank, submitted 
proposed changes of the PRML to Parliament in November 2005, including 
abolishing the Future Generations Fund (FGF), expanding priority 
sectors to include others such as justice, territorial administration 
and security, increasing the percentage of direct oil revenues that can 
be used in non-priority sectors from 13.5 percent to 30 percent, and 
expanding the scope of the law to all oil fields. On January 6, 2006, 
the World Bank suspended new loans and grants as well as disbursements 
of the ongoing IDA operations, while reiterating its commitment to 
assist the government in addressing the country's financial problems. 
On April 25, 2006, following intense negotiations, the two parties 
reached an understanding on the resumption of cooperation based on a 3-
month interim agreement that would ensure that oil revenues served the 
Chad's poor and allow more time to develop a comprehensive solution.
    The impact of economic growth and oil revenues on the rural 
population remains to be seen, although efforts to promote linkages 
between oil production and poverty reduction have continued. The 
government released the second Poverty Reduction Strategy Paper (PRSP) 
Progress Report in December 2005 and plans to complete an update of the 
PRSP strategy by the end of 2006. This exercise, in the opinion of the 
World Bank, ``will offer the opportunity to develop a shared vision of 
development between the government and stakeholders and to reinforce 
significantly the coordination between core and line ministries for the 
implementation of this vision.'' \2\
---------------------------------------------------------------------------
    \2\ Chad-Cameroon Petroleum Development and Pipeline Project; 
Eleventh Semiannual Report to the Executive Directors (July 2005-April 
2006), The World Bank, June 7, 2006, p. ii.
---------------------------------------------------------------------------
    All in all, the Chad-Cameroon Pipeline project remains a very high-
stake, high-risk venture for the World Bank Group and the lessons 
learned from this experience will certainly affect the design of 
similar operations in the future. According to the latest report, ``the 
World Bank team hopes that the interim agreement reached on April 26 
will lead to a more comprehensive agreement on the management of oil 
revenues which guarantees the use of resources for Chad's poor in the 
long term.'' \3\
---------------------------------------------------------------------------
    \3\ Op. cit. p. iv.
---------------------------------------------------------------------------
    In sum, the Government of Chad and the World Bank agreed on the 
implementation of adequate safeguards regarding the Chad-Cameroon 
project. From the experience gained in the operation of the project, 
additional safeguards are needed. Had the World Bank not been involved 
in the financing of the project, it would certainly be much more 
difficult to rectify the situation.

    Question. According to your analysis, what are specific lessons 
learned from Camisea I that should be applied to Camisea II?

    Answer.

   The feasibility of a megaproject like Camisea depends highly 
        on its environmental and social sustainability;
   The IDB's support has been critical to incorporate major 
        improvements in the legal framework based upon the observance 
        of internationally accepted standards. For the second phase of 
        the project, it is fundamental to have the early engagement of 
        the IDB and other IFIs;
   It is necessary to have a program for the protection and 
        defense of the rights of the most vulnerable indigenous 
        populations in the areas where the project is implemented;
   State environmental and social monitoring must be 
        multiagency and system wide;
   The Government of Peru was not adequately prepared to 
        monitor and supervise such a huge and complex project;
   There are specific areas where the learning process has been 
        fundamental: monitoring process, citizen participation, socio-
        environmental impact prevention, and environmental and social 
        regulation; and
   With the support of IFIs, NGOs and stakeholders, a new 
        environmental scheme for hydrocarbon activities should be 
        designed and implemented.

    In sum, the objective should be to achieve sustainable development 
through the rational exploitation of our natural resources.
                                 ______
                                 

 Responses of Hon. Carlos Herrera Descalzi to Questions Submitted for 
                               the Record

    Question 1. Is Camisea bringing development benefits to Peru and, 
in particular, to affected communities?

    Answer. Camisea is bringing benefits to Peru as a total and under a 
macroeconomical view.
    But it is not at the level it should have been done nor the right 
time to do it. There is a 2-year delay regarding activities that should 
have been initiated before the project came to an end, as to arrive 
together with the gas. The state forgot to give enough time and effort 
to prepare a consumption market in order to accelerate this 
substitution.
    As the communities are concerned, it is not clear that damage is 
smaller than the benefits received. It was of importance not only to 
give money, but to ensure that that money was useful to them or that if 
it was being used adequately.

    Question 2. How, if at all, should the project design have been 
changed to maximize benefits for the people of Peru and minimize 
impacts on the indigenous peoples and the environment?

    Answer. Mainly, by an effort to respect the contracts like they 
were agreed; especially regarding the application of international 
standards.
    It is important that financing institutions care to the achievement 
of strategic goals and not only to reduce approval to acceptance of a 
checklist. It is important to preserve the vision of the project.
    The banks assumed the environmental commitment counting with the 
highest standards, allowing that the financing count with the 
environmental and social guarantee. However, what it is clear to see is 
that practice is not always successful.
    It is advisable to reformulate the objectives, asking whether 
Camisea contract has been treated as a checking list or it has taken 
into account the results. In opinion of Peruvian experts dealing 
directly with those matters, the Bank should supervise the compliments 
of these objectives that will be mentioned below:

   Camisea Fond (FOCAM): It was originally conceived as an 
        instrument to help that the financing could reach the local 
        communities for their development. The state, before complying 
        with these objectives, gave the Camisea Fond a meaning of 
        royalties. The Bank only verified the creation of this fond but 
        failed to verify if this financing reached the said benefits 
        for the development of the said local communities.
   Environmental Strategic Evaluations (ESE): Up to this date, 
        it has not been possible to implement this instrument, 
        originally conceived to identify policies and develop programs 
        for projects. The Bank should supervise the comply of this 
        instrument, taking into account that further hydrocarbon 
        projects in the Urubamba area shall be put into consideration 
        that further projects will be presented to the Bank.
   Commission for the Camisea Defend (CCD): The objective to 
        create CCD was to be used as a mechanism to give more 
        transparency to the whole process and to benefit the 
        communities involved. However, to create other parallel 
        institutions (to ombudsman) with these same objectives seems 
        not to be adequate. Another important issue is that this 
        institution does not count with the trust of the indigenous 
        communities. In ombudsman report No. 103, titled ``Camisea 
        Project and Its Effect on Persons.''
   Plans of Right of Way: Even though there is a commitment 
        with the Bank for the reforestation of the involved areas 
        planned for the access control and a plan for the migration 
        control, none of these have been observed.

    After the five failures of the tubing, it can be observed that the 
project has technical problems, a situation that gives uncertainty with 
respect to the way that the social and environmental policies want to 
be implemented in the Camisea project.

    Question 3. If there have been negative impacts in Peru from this 
project, how could they have been avoided?

    Answer. Most of the problems arise from the lack of supervision and 
political willing to sanctions. Most of the finings of OSINERG were not 
effective.
    Asking persons involved in Camisea project, the following proposals 
were mentioned:
    (a) Selecting companies that are willing and able to invest up 
front to avoid, mitigate, repair, and/or compensate the direct and 
indirect social and environmental impacts.
    Main criterion for the selection process was the amount of 
royalties to be paid. Companies did not have to prove their 
environmental and social performance.
    (b) A proper legal framework is necessary as well as strengthening 
of institutions in charge of supervision and control.
    It could be observed that each productive sector has its own small 
environmental office in charge of approving the environmental impact 
assessments, to be coordinated by the CONAM which has the mandate to 
coordinate among the different sectors.
    As a result of structural reform during the 1990s, government was 
radically downsized, in part due to recommendations of multilateral 
banks. This downsizing also included institutions regulating and 
supervising productive activities. The structural reform also made it 
very difficult to create new permanent positions in any government 
institution, a good policy to avoid senseless hiring but it backfires 
now when the need for a stronger supervision is apparent.
    Lack of funds implied that OSINERG staff had to rely on consortium 
logistic to get to the areas to supervise.
    Even with such difficulties, OSINERG imposed two fines during 
construction amounting to US $1,700,000. Fines are not a deterrent 
because companies can always sue the government and keep the litigation 
for years.
    (c) Companies should have been forced to use Shell's standards in 
terms of transparency of information, participation of civil society, 
involvement in local development, care for the environment, etc. Banks 
should have really enforced its loan conditions.
    (d) Government and Bank should have supported communities to 
negotiate with companies.
    Based on opinions of involved parties, information was received 
that companies used their own criteria, their sheer strength and 
intimidation tactics to negotiate compensation and reparations with 
communities during construction and operation. Dismal differences among 
communities increase the feeling of unfair negotiation conditions.
    (e) Time goals set should have been more realistic and production 
start should have been postponed to allow for a more careful 
construction.
    The completion of the project on time was the only important 
consideration for government, without regarding consequences. Five 
reported large leakages, breakages, or spills in the first 18 months of 
operation, this point to severe deficiencies in the design and/or 
execution of the project. There were reports (URS and Knight Piesold) 
that repeatedly point out that construction (opening the right of way 
and installing the pipes) went far too fast for the revegetation and 
erosion control crews to keep up the pace, they were severely 
understaffed.
    (f) Soil study should have been conducted to guide the design and 
soil stabilization needs.
    From the onset it was clear that the project was to have a lot of 
problems related to steepness of the terrain, soil instability, extreme 
rainfalls, and isolation, among others. According to the conclusions of 
the commission of the Peruvian Congress, the path of the pipeline was 
designed without a proper soil study. Periodical reports from URS 
stated again and again the need to take soil stabilization and erosion 
control seriously.
    (g) Government should have been taking the right approach to 
strengthening its institutions, as perhaps giving CONAM a stronger 
mandate.
    Camisea Defense Committee (CDD) was perceived as a trick to get 
ombudsman out of the way. In spite of this maneuver, ombudsman 
published a long report with all the instances where the project 
violated people's rights, holding the companies and the government 
itself responsible for these violations.
    CONAM states in a report that the Camisea project with its ad-hoc 
solutions to favor the projects, implementation has undermined the 
ability of the government to fill out its role of environmental 
advocacy.
    The organism for Paracas Bay was created right before the approval 
of the loan, but funds to implement its activities only were available 
10 months later.
    (h) Government should have heeded civil society's advice or demands 
for an audit to the construction process and the environmental and 
social impacts to reestablish confidence in the government and 
companies' intention.
    Problems with the selection of the plant in Paracas, change of use, 
partial EIA, etc., brings the impression that everything was possible 
to keep the time schedule. Five spills had to occur until audits were 
commissioned by the government and the Bank.
    (i) A proper strategy to deal with vulnerable groups should have 
been put in place to protect the people.

    Question 4. Have the Government of Peru and the Inter-American 
Development Bank implemented adequate safeguards to ensure that the 
revenues and royalties generated from the pipeline are used correctly, 
that poverty reduction and development benefits are maximized, that 
compensation is distributed fairly, and that environmental, social, and 
health impacts are prevented or mitigated?

    Answer. Regarding these issues, the testimony that I can give 
should be considered as indirect as though I have not directly 
participated in these processes. I have had the opportunity to get in 
touch with formal related organizations like Asociacion Civil Labor, 
Derecho Ambiente y Recursos Naturales (DAR-Peru), Escuela para el 
Desarrollo, World Wildlife Fund--WWF (WWF-Peru), Sociedad Peruana de 
Derecho Ambiental (SPDA) and Oxfam America.
    Through their statements, arguments, and after verifying the 
solidity of their answers, which have appeared to me that they are 
consistent, it can be deduced that the Peruvian Government and the Bank 
have not been able to reach too much success over the items that 
covered this question. The results that have been reached are far away 
of what they should have been obtained. What has been done mainly is a 
checking list with items that have been taken as objectives, to only 
say that the activity had been complied, but without previously verify 
its true compliance. All the expenses that were made, just upon 
checking a list filled out in a routine way, just gave a result that 
the goals were not reached.
                                 ______
                                 

    Responses of Dr. Korinna Horta to Questions Submitted by Senator 
                    Richard G. Lugar for the Record

    Question. Have you had any professional relationships with the 
Chad-Cameroon project companies?

    Answer. No, I don't have and never had professional relationships 
with any of the companies involved with the Chad-Cameroon project.

    Question. How should the project and revenue management design be 
changed to maximize benefits for the people of Chad and Cameroon and 
minimize impacts on the affected people and the environment?

    Answer. There are two key problems that should have been addressed 
before the project was approved by the World Bank: (a) Lack of 
demonstrated government commitment to poverty reduction; and (b) lack 
of institutional capacity to manage the economy in the oil-era (in 
Chad) and to address the environmental, social, and public-health-
related impacts of a project of this magnitude.
    Although it is more difficult to address these problems now, it is 
critical that the World Bank use its leverage and resources to:
    In the case of Chad:

   Strengthen the oversight committee charged with ensuring 
        that oil-related revenues are used for poverty reduction (70 
        percent as per the World Bank's new agreement of July 14, 
        2006); and
   Ensure that the reports by the oversight committee lead to 
        concrete follow-up action and corrective measures and/or 
        sanctions as necessary.

    In the case of Cameroon:

   Ensure that the government use oil royalties for adequate 
        compensation to affected communities and the restoration of 
        livelihoods; and
   Ensure that the indigenous Bagyeli people continue to have 
        access to their traditional forest lands and that they receive 
        land and other adequate compensation where full access cannot 
        be restored.

    In both Chad and Cameroon:

   Renew efforts to build government capacity to address the 
        environmental, social, and public-health-related problems 
        related to the project; and
   Actively monitor and report on how these problems are being 
        addressed.

    Question. To your knowledge, was civil society given the 
opportunity to provide input into the agreement announced by the World 
Bank and Chad on July 14, 2006?

    Answer. To my knowledge, civil society in Chad, as well as 
internationally, did not have the opportunity to provide input into the 
agreement announced by the World Bank and Chad on July 14, 2006.
                                 ______
                                 

Responses of Manish Bapna to Questions Submitted by Senator Richard G. 
                          Lugar for the Record

    Question. Have you had any professional relationships with the 
Camisea project or Chad-Cameroon project companies?

    Answer. No, I do not have any professional relationships with such 
project companies.

    Question. In your testimony, you note that there is a ``long record 
of failures of many large, high-risk infrastructure projects.'' Why do 
these projects continue to receive funding if they keep failing to 
produce positive development outcomes? How can the MDBs and the 
administration resist political pressure to fund high-risk projects?

    Answer. Funding continues for large high-risk infrastructure 
despite repeated failures because powerful, vested interests stand to 
gain from such investments. Reasons include:

   Ministers/MoF/MoI/MoE: Projects tend to serve broader 
        political objectives and ambitions.
   MDB boards and management: Keen to lend money--preferably in 
        large tranches.
   Bureaucrats and politicians gain handsomely through 
        widespread corruption.
   Multinational and domestic firms benefit from lucrative 
        supply and construction contracts.
   Macroeconomists stubbornly adhere to the belief that big 
        projects promote growth and this is all that is needed to 
        reduce poverty. Engineers (and I am one) also subscribe to the 
        ``bigger is better'' theory. Economists suffer from the age-old 
        problem that large infrastructure works in theory but not in 
        practice. Whereas what I term ``smart infrastructure'' works in 
        practice but not in theory.

    MDBs and the U.S. administration do have an important role play. 
They can't dictate which large infrastructure projects are in a 
country's best interest. But they can insist on a robust process and 
can encourage lending in new, more pro-poor areas through sector/
subsector lending targets:

    1. Recommendations mentioned earlier on options assessment can help 
insulate the selection process from political, vested interests--by 
creating a more transparent, inclusive, and accountable environment in 
which decisions are taken.
    2. Moreover, lending targets encouraging a shift to smart 
infrastructure would provide MDBs with a legitimate reason to decline 
considering high-risk, politically-motivated projects.
    3. A third recommendation focuses on governance, which is a salient 
theme in the project cases discussed today.

    Infrastructure projects whose poverty-reduction potential depends 
on revenue generation can only succeed in a context in which there are 
basic assurances of a minimum level of government accountability to the 
public. Benchmarks for good governance should be met prior to MDB 
support for large, high-risk infrastructure projects. Numerous projects 
(and Chad-Cameroon most vividly) illustrate the risk of supporting 
projects before such capacity is in place. It is much easier to 
construct a dam or pipeline than it is to build good governance. By 
waiting until good governance in a country is demonstrated, the risk of 
supporting politically-motivated infrastructure that fails to deliver 
positive development outcomes is significantly reduced.
                                 ______
                                 

      Article From Ethics World Written by Peter Bosshard of the 
  International Rivers Network and Shannon Lawrence of Environmental 
                                Defense

              THE WORLD BANK'S CONFLICTED CORRUPTION FIGHT

    World Bank President Paul Wolfowitz has called corruption the 
single most important obstacle to development and has ratcheted up the 
fight against graft in Bank projects. While this effort is welcome, it 
is being undermined by the Bank's simultaneous increase in 
infrastructure lending. The experience of Pakistan's water sector shows 
that the Bank's self-interests facilitate rather than discourage 
corruption in infrastructure development. Unless the World Bank 
addresses upstream the corruption incentives that drive infrastructure 
decisions, the poor will continue to be deprived of access to essential 
services.
    After closely following the script of his predecessor, in early 
2006 the new President of the World Bank, Paul Wolfowitz, finally 
revealed his own vision for the embattled development institution. 
Identifying corruption as the single largest obstacle to development, 
he held up loans to India, Bangladesh, Kenya, and Chad because of 
corruption concerns and increased the budget of the Bank's 
anticorruption unit. ``This is about making sure that the Bank's 
resources go to the poor and don't end up in the wrong pockets,'' 
Wolfowitz told U.S. News & World Report. ``It is about fighting 
poverty.''
    Critics have long accused the Bank and other donors of turning a 
blind eye to the leakage of development funds, leaving corrupt 
contractors and officials flush with cash, governments saddled with 
``white elephant'' projects and odious debt, poor people devoid of 
essential services, and the environment unprotected. The World Bank 
began to address the ``cancer of corruption'' under President 
Wolfensohn, and Paul Wolfowitz's pledge to ``move from talking about 
corruption to dealing with corruption'' is welcome. Yet the world's 
largest development institution still attempts to treat the symptoms 
and not the cause of the disease. In fact, the Bank's current lending 
strategies might even be fueling the corruption epidemic.
    Just as the Bank vows to get tough on corruption, it has 
simultaneously announced a big increase in its support for 
infrastructure, the sector perceived to be the most corrupt globally 
according to Transparency International. In fact, approximately half of 
the World Bank anticorruption unit's investigations that have led to 
specific corrective actions were linked to infrastructure projects.
    Massive, centrally planned and financed water, energy, transport, 
and other public works projects are particularly prone to corruption, 
thanks to their complexity, capital intensity, and high price tags. 
They offer larger spoils than small-scale projects and programs to 
increase the efficiency of existing infrastructure. Unless corruption 
is checked in the earliest stages of the planning process, corrupt 
politicians, government officials, and construction companies will 
always favor large-scale projects to address a country's infrastructure 
needs.
    Development efforts can only be effective if they reflect a 
country's own priorities. The World Bank has acknowledged the 
importance of ``country ownership'' in recent years. Yet it has tended 
to equate country ownership with government ownership and government 
ownership with ownership by finance and infrastructure ministries. The 
Bank has limited the opportunities for civil society input in the 
development of infrastructure strategies, and cut down the preparation 
time for infrastructure projects.
    Combined, the Bank's push into infrastructure, the emphasis on 
government ownership, and the limited accountability to civil society 
are creating large opportunities for corruption in a sector in which 
graft is already endemic. If the World Bank does not address the 
incentives for corruption upstream, fighting graft in individual 
contracts will be a losing battle. If its fight against corruption 
continues to be focused reactively on specific projects, infrastructure 
development will remain distorted, the poor will be deprived of 
essential services in many countries, and the environment will continue 
to be neglected.
Infrastructure, corruption, and development failures
    Building infrastructure projects in the developing world is a $200 
billion business that provides a plethora of opportunities for 
corruption. Bribes are paid to secure concessions and kickbacks are 
provided in exchange for contracts. Bid rigging occurs, shell companies 
are established, and procurement documents are falsified. Substandard 
materials are used in construction, regulators are paid off, and prices 
for infrastructure services are inflated. Compensation for forcibly 
displaced communities ends up in the pockets of bribe-seeking local 
officials. The World Bank acknowledges these corruption risks, but it 
has not figured out what to do about them. A recent Bank report about 
infrastructure acknowledges that ``anticorruption is the area where the 
largest gaps remain in our understanding of what works and what does 
not.''
    Given the enormous potential pay-offs, it is not surprising that 
there are often powerful vested interests behind big, new public works 
projects. Peter Eigen, the founder of Transparency International, 
argues that corruption in the construction sector not only plunders 
economies; it shapes them: ``Corrupt government officials steer social 
and economic development toward large capital-intensive infrastructure 
projects that provide fertile ground for corruption.'' Paul Collier and 
Anneke Hoeffler explain: ``If budget decision-makers themselves are 
corrupt, they may decide to skew the budget towards infrastructure 
spending so as to increase the opportunities for corruption. If roads 
are more capital-intensive than primary education, the budget may be 
skewed towards roads . . . and if there is more opportunity for 
corruption in road construction than in road maintenance, then roads 
may be built, allowed to fall apart, and then rebuilt.''
    Similarly, large dams, massive irrigation systems, and river 
diversion schemes, some constructed with World Bank support, are often 
touted as the solution to the water and energy needs of the poor. 
Rarely, however, are alternative options assessed. The World Commission 
on Dams (WCD) pointed out that ``the pressure on development aid 
agencies to move large amounts of capital . . . argued for large-scale 
solutions such as large dams.'' Even as large dams have provided fewer 
than anticipated benefits, forced tens of millions of people from their 
lands, and destroyed rivers and river-based livelihoods, they have 
tended to prevail over alternative options. The WCD noted: ``Decision-
makers may be inclined to favor large infrastructure as they provide 
opportunities for personal enrichment not afforded by smaller or more 
diffuse alternatives. The consequences frequently directly affect the 
poor and the environment.''
    The political economy of infrastructure development ``doesn't just 
line the pockets of political and business elites; it leaves ordinary 
people without essential services,'' according to Peter Eigen. The push 
for big projects diverts resources from decentralized, community-based 
options and from the maintenance of existing infrastructure. 
Ultimately, local people are stuck with the economic, social, and 
environmental costs of infrastructure projects that may not be the best 
option for providing water or energy services--or may not even be 
providing them at all. These two problems, namely corruption and unmet 
needs for infrastructure services, are closely linked.
The Pakistan case
    Pakistan's Indus Basin Irrigation System, the world's largest water 
diversion scheme with more than 1.6 million kilometers of watercourses, 
is a prominent example of how corruption pervades economic development 
and distorts the priorities of infrastructure investment. It also shows 
how the World Bank's business model and development paradigm encourage 
rather than counteract the pervasive dynamics of corruption.
    Pakistan's irrigation system has been shaped by the World Bank's 
approach to water infrastructure for five decades. In the 1950s, the 
bank brokered a water treaty between India and Pakistan which created 
the foundation for irrigating the Indus Basin. It helped devise the 
policies and institutions of Pakistan's water sector in a series of 
master plans and reports, and has loaned almost $20 billion (in 2005 
prices) for projects in the sector.
    The Indus Basin Irrigation System is a central planner's dream 
turned concrete. Its corner stone, the Tarbela Dam, was the largest 
manmade structure on earth at the time of its construction. Tarbela is 
just 1 of 19 dams that block and divert the basin's mighty rivers. 
Large canals, drainage highways, and more than 100,000 distributaries 
crisscross the Indus basin.
    Today, the Indus Basin Irrigation System serves an area the size of 
Bangladesh, and generates more than one fourth of Pakistan's electric 
power. Yet the system is in deep crisis. The irrigation network 
operates extremely inefficiently, and sedimentation is rapidly reducing 
the capacity of its reservoirs. More than 60 percent of irrigation 
water is lost from the canal head to the root zone, and a lot of water 
is wasted on thirsty crops such as sugar cane that are not suited to 
the arid Indus Basin. Average crop yields are much lower than in 
neighboring India.
    The construction of reservoirs and canals caused the forcible 
displacement of more than 200,000 people in Pakistan. Decades after 
they were moved, thousands of families are still living in misery. A 
report prepared for the World Bank argues that the lack of replacement 
land and corruption in the system are ``creating extreme hardship for 
people.''
    Pakistan's irrigation network has always served the privileged 
elite at the expense of the poor. World Bank and government programs 
have consistently favored feudal landowners. When the irrigation system 
was established, the government failed to recognize the land rights of 
the original inhabitants and allotted irrigated plots to rich 
landowners and military personnel. While large and very large farmers 
control 66 percent of all agricultural land in Pakistan, almost half of 
all rural households own no land. A World Bank evaluation noted in 1996 
that the bank's projects ``provided large and unnecessary transfers of 
public resources to some of the rural elite.''
    The top-down engineering approach to Pakistan's water sector has 
also caused massive collateral damage downstream. The Indus Basin 
Irrigation System starves areas of Sindh province--and particularly the 
Indus Delta--of water and sediment. And because the sediment trapped in 
the reservoirs does not replenish the delta, close to 5,000 square 
kilometers of farm land have already been lost to the sea. Meanwhile 
salt water is intruding 100 kilometers upstream in the Indus. The lack 
of water and sediment is destroying flood plain forests that are home 
to hundreds of thousands of people and mangrove forests that help 
protect the coast against storms.
    While the downstream areas suffer from a water shortage, wasteful 
water use is wreaking environmental and economic havoc in the command 
area. Over-irrigation and inadequate drainage have caused the water 
table to rise across a large area. As a result, about 60 percent of all 
farm plots in Sindh are plagued by water logging and salinity.
Corruption in Pakistan's water sector
    Pakistan's water sector, like many of those around the world, is 
fraught with large- and small-scale corruption. According to a 2003 
survey by Transparency International, Pakistan's Water and Power 
Development Agency is perceived to be the second most corrupt 
institution in the country. Close to half of the more than 31,000 
complaints received by Pakistan's anticorruption ombudsman in 2002 were 
related to this one institution. As the World Bank's 2005 Pakistan 
water strategy admits, top positions in the country's water bureaucracy 
are sold at a high price.
    Corruption works in a variety of ways in Pakistan's water sector. 
After paying high sums to secure senior government positions, officials 
need to recoup their costs in the form of kickbacks. They can do so 
primarily through projects that serve construction companies and large 
landowners, not through improved maintenance programs and low-cost 
projects that serve the poor. This is why the water bureaucracy, as the 
World Bank puts it, suffers from a ``build-neglect-rebuild'' syndrome, 
and ``has yet to make the vital mental transition from that of a 
builder to that of a manager.''
    Even resettlement programs are a source of patronage, which rewards 
rather than penalizes large-scale displacement projects such as dams 
and canals. ``Pakistan has well established corrupt practices in the 
revenue departments that hurt the interests of those who are 
resettled,'' notes Pervaiz Amir, a consultant to the World Bank on 
large dams. ``The manner in which resettlement and rehabilitation is 
handled becomes susceptible to patronage and corruption and it becomes 
difficult to ensure that every affected person is treated fairly and 
receives his or her due share.''
    Many officials in Pakistan's water sector also allocate irrigation 
water to the highest briber and not necessarily to the most needy or 
productive farmers. ``Payments to irrigation officials to ensure the 
delivery of sanctioned water supplies were reported as routine and 
endemic'' the World Bank found in 2002, and ``water availability 
clearly depends on efforts to bribe irrigation officials.''
    Corruption is allowed to flourish because Pakistan's water sector 
lacks transparency and accountability. Water allocations at all levels 
of the irrigation system are not disclosed to the public, for example. 
The World Bank concludes: ``In the shadows of discretion and lack of 
accountability, of course, lurk all sorts of interests--of powerful 
people who manipulate the system for their ends, and of those in the 
bureaucracy who serve them and are rewarded for this service.''
Alternatives exist
    Brick-and-mortar investments in centrally managed dams and canals 
are not the only way to address Pakistan's water and energy needs. 
Because the existing infrastructure is not being properly maintained 
and so much water is being wasted, the efficiency of the irrigation 
system could be greatly increased. Plugging the leaks of the existing 
system is environmentally more benign than building new dams and 
canals.
    It is also more economical. A World Bank evaluation found in 1996 
that water conservation measures saved more water than the largest new 
dam in Pakistan's investment program could have stored, and at one-
fifth the cost. The Asian Development Bank estimates that an additional 
4.7 million acre-feet of water could be provided either by conservation 
measures at a cost of $1.7 billion, or by a new dam with a price tag of 
$4.5 billion.
    Decentralized and nonstructural solutions to Pakistan's water 
crisis also exist. The Indus Valley has huge groundwater reservoirs, 
which could store many times as much water as all future dams. 
Recharging these reservoirs would require more sustainable flood 
management practices which allow the Indus to overflow its banks 
temporarily rather than confine it within massive embankments.
    Farmers still irrigate thousands of square kilometers of land 
through traditional techniques outside the modern canal system, and 
without support from the government or World Bank. Rainwater harvesting 
and simple, affordable treadle pumps provide a steady supply of water 
to farmers, without the added costs of bribes for water officials or 
diesel pumps. Drip irrigation kits apply water directly to the roots 
rather than the furrows, and use only half as much irrigation water in 
the process. An innovative way of planting rice without standing water 
(called the System of Rice Intensification) allows rice--a particularly 
thirsty crop--to be grown using only half the amount of water while 
boosting harvests. Such soft approaches have been adopted with good 
success around the world, and are being introduced in Pakistan. 
Shifting control over water resources from bureaucrats and absentee 
landlords to poor farmers would ensure a more economic use of water, 
reduce poverty, fight corruption, and protect the environment at the 
same time.
Slow learners
    In 2003, the World Bank argued that a ``genuine paradigm shift'' 
emphasizing the proper management of water resources rather than new 
infrastructure was needed in Pakistan. Yet the bank's new water 
strategy for Pakistan does not reflect this paradigm shift. It asserts 
that ``Pakistan has to invest, and invest soon, in costly and 
contentious new dams.'' The 2005 strategy recognizes the potential for 
efficiency gains, but does not address the maintenance gap in the water 
sector, and the serious social and environmental impacts of the current 
approach.
    In January 2006, General Musharraf announced that his government 
would soon start construction of the Bhasha and Kalabagh Dams. The two 
dams will cost more than $20 billion, will displace an estimated 
160,000 people, and will further reduce downstream flows.
    The World Bank prepared its water sector strategy for Pakistan 
without any input from civil society. It argued that ``while all voices 
must be heard, much greater weight must be given to the voices of those 
who have responsibility and face the voters, and less to those who are 
self-appointed or who represent small special interests.'' This is a 
remarkable statement about a country that is marred by corruption, in 
which top government positions are for sale, and which is run by a 
self-appointed military ruler.
    Pakistan is a prominent example for the pervasive impacts of 
corruption on development planning. Yet as Eigen, Collier, Hoeffler, 
and others have pointed out, the mechanisms that distort the 
development of Pakistan's water sector are widespread. White elephant 
projects that made no economic sense and failed to deliver any 
developments benefits--like the Bataan nuclear power plant in the 
Philippines, India's Dabhol power plant, and the Turkwell Dam in 
Kenya--can be found around the world.
    Why are governments and the World Bank so obviously flouting the 
lessons of the past? The Bank has always been good at evaluating its 
own performance, but is notorious for ignoring evaluation findings in 
subsequent operations. And although Bank managers frequently speak out 
against corruption, the institution's self-interests align with and 
reinforce the interests of corrupt borrowers and contractors in various 
ways.
    The Bank covers its administrative costs from the profits it makes 
by lending to middle-income countries. It has to continue lending to 
these countries in order to sustain its own business model. Since 
middle-income countries can raise capital on the private market, the 
World Bank must keep its lending costs low so as to not be out-competed 
by private banks. It is easier and cheaper for the Bank to invest in 
large brick-and-mortar projects than to process loans for small, 
decentralized irrigation schemes, or for cheap but institutionally 
complex programs to improve the maintenance of existing infrastructure.
    The interests of the World Bank's member governments have helped 
define those of the institution's bureaucracy. Northern governments 
favor loans that pay for the contracts of international consultants and 
construction companies. Borrowing governments prefer bulky projects 
that yield ribbon-cutting opportunities and political prestige, support 
centralized bureaucracies, and offer spoils for patronage. The bank's 
institutional self-interests translate into an incentive structure that 
rewards staff for pushing money out the door quickly, and not for 
achieving lasting developing impacts. For example, Paul Wolfowitz 
recently promoted the author of the Pakistan water sector strategy to 
become the Bank's country director for Brazil.
    The World Bank's preference for brick-and-mortar projects has 
undermined efforts to improve the performance of Pakistan's water 
sector before. In the 1980s, the bank approved four projects to 
rehabilitate the existing canal system and stem water losses. When the 
water bureaucracy resisted change and misused the loans for building 
new canals, the World Bank looked the other way. As an internal 
evaluation found, ``the Bank did not insist on the implementation of 
the agreed strategy against the pressures of special interests,'' and 
``[its] concern to keep disbursement flowing reinforced this focus. . . 
. The Bank helped to further this distortion of objectives by making it 
plain that construction progress was the highest priority.'' In 
Pakistan and elsewhere, the Bank's self-interests conflict with its own 
development objectives and will continue to thwart its efforts to fight 
corruption.
                                 ______
                                 

USG IDB Board Statement: Peru--Proposal for a Loan for Camisea Project 
                    September 10, 2003 (Abstention)

    The United States is abstaining on IDB financing of the Camisea gas 
project. We wanted to be able to vote in favor of this project, and 
went to unprecedented lengths to work with the IDB, the project 
sponsors, and the Government of Peru to strengthen its environmental 
and social protections. We greatly appreciate the efforts and patience 
of IDB management and staff, the project sponsors, and the Government 
of Peru to work with us to address these risks. We are encouraged by 
recent actions by the Government of Peru, project sponsors, and the IDB 
to improve the project. We applaud the government's commitment to 
improve the marine reserve area.
    The United States strongly supports President Toledo and his goals 
for increasing Peru's economic growth and improving the standard of 
living for Peru's people. The Camisea project offers profound economic 
benefits for Peru, forecast to boost Peru's economic growth by nearly 1 
percent per year over its 30-year expected operation. Regardless of our 
vote, our expectation is that the Camisea project, now 70 percent 
constructed, will be completed soon, bringing these benefits to the 
people of Peru. We look forward to continuing to work with Peru in the 
sound development of its hydrocarbon industry.
    Our decision is based in part on indications that private financing 
may be available on favorable terms. In addition, unfortunately, the 
IDB's involvement was constrained because it did not formally apply its 
environmental policies to the upstream component of the project, and 
began serious engagement with the downstream sponsors only after the 
project's design was completed. We are also concerned that tight 
completion deadlines set by Peru's authorities became a serious 
obstacle to mitigating environmental risks and encouraged the sponsors 
to expedite construction, sometimes in advance of receiving government 
approvals. Finally, we have not been able to allay doubts about the 
adequacy of the environmental assessment conducted for the project.
    Looking ahead, this project highlights the pressing need for the 
IDB to establish a policy to improve consultation with and address the 
needs of indigenous peoples. We want to work with the IDB on the 
application of its environmental oversight to facilities that are 
closely related to projects being funded.
    In closing, I want to reiterate my government's profound gratitude 
for the hard work done by IDB management and staff, the Government of 
Peru, and project sponsors to improve the Camisea project. We applaud 
commitments made and are prepared to help bilaterally with Peru's 
efforts to improve the quality of the natural environment in Paracas 
Bay. In fact, the United States is committed to provide roughly $2 
million over the coming 2 years to help with these efforts. We will 
continue to support wherever possible, well-designed initiatives to 
increase Peru's economic growth, including in the IDB.
                                 ______
                                 

  World Bank--Chad Cameroon Pipeline and Capacity Building Projects--
            United States Position--Board Date: June 6, 2000

                              INTRODUCTION

    1. For Chad, the potential benefits are huge, but so are the risks. 
The large prospective inflow of oil revenue over a period of almost two 
generations represents an unparalleled opportunity for major, enduring 
progress toward equitable economic development and poverty reduction. 
It represents a new hope around which to build a cohesive national 
program for the future. It represents potential funding for the 
priority social investments on which that future actually rests. And it 
represents a unique opportunity to introduce some of the instruments 
and institutions that are integral to responsive and transparent 
government.
    2. Arrayed on the other side are the risks and the hard realities. 
There is the reality that natural resource extraction in much of the 
world has, alone, rarely contributed to durable and widely shared 
social progress. More often than not, it has been a major source of 
economic distortions and social divisions. There is the reality that 
major infrastructure projects of this type inherently bring 
environmental and social disruptions even when approached with maximum 
care and foresight. There is the reality, and let us be frank, of 
pervasive and debilitating corruption in both Chad and Cameroon. There 
also is the reality that those people whose lives will be most directly 
affected by this project have reason to doubt that their voices will be 
heard and heeded in the future.
    3. Much the same must be said for the Bank: Major opportunities 
arrayed against major risks. This is an opportunity for the Bank to 
make a measurable contribution toward meeting its core purpose--
sustainable poverty reduction. It is an opportunity to apply rigorously 
a whole slate of mandated policies by which the Bank now fundamentally 
defines itself as an institution. And it is an opportunity to set a 
higher operational standard for the Bank group, for all of its 
borrowers, for the development community more broadly, and for the 
private sector.
    4. We are all well aware of the risks. The World Bank and other 
multilateral financial institutions are under acute scrutiny and 
criticism, some of it fully justified. The results of many years of 
effort and billions of dollars have fallen well short of aspirations, 
especially in Africa. And too often this institution has supported 
operations that do not measure up to either what is possible or to what 
is required. Especially in the wake of recent project-related problems 
in the Bank, there is no mystery why this project has the profile it 
does, nor why it may well represent a defining moment for this 
organization.
    5. For all of these reasons it is incumbent on us to satisfy 
ourselves that the risks and aspirations, and the project details 
themselves, have all been carefully, fairly, and thoroughly reviewed. 
We therefore welcome the extensive dialog we have had with Bank staff 
and management, with other shareholders, and with a wide variety of 
other interested groups. We have benefited greatly from the information 
we have received from many sources, including all of the supplemental 
material the Bank has helpfully provided, and have reviewed and weighed 
all of it with great care and seriousness.
    6. The Bank deserves credit for the extensive changes to and 
improvements in the full range of the pipeline project's core design 
and monitoring features resulting in large part from questions and 
concerns raised by both shareholders and outside groups. The pipeline 
has been substantially rerouted; unprecedented mechanisms have been 
accepted to monitor and supervise oil revenue flows, and to direct them 
largely to social investment priorities; firm commitments have been 
made with respect to public engagement in monitoring work, including 
regular dissemination of detailed project status information to the 
public and, the Bank has committed to extensive reporting and 
additional analysis on all of the major issues of public concern.
    7. Public reservations and analysis, and our own, have converged 
around a few specific issues and concerns that most of us regard as 
paramount. They are the project's environmental and social elements, 
the use of future resources produced by the investment and, the 
provisions for monitoring, reporting, and public participation.

                    ENVIRONMENTAL AND SOCIAL ISSUES

    8. We welcome the major improvements made to the project's 
technical design and siting as a result of the important concerns 
raised about inadequacies on its original design, particularly the need 
to minimize disruption of fragile communities and ecosystems. A serious 
and open-minded examination of alternative designs must be central to 
the Bank's approach in all circumstances.
    9. We also welcome the extra internal efforts we have been assured 
the Bank has made to guarantee full compliance with all relevant Bank 
policies. The direct and unambiguous assurances we have personally 
received on this point gave us the higher level of confidence on this 
crucial issue that we would welcome in other cases.
    10. This said, it is also true that important details remain to be 
provided in several crucially important areas. The General Oil Spill 
Response Plan, by design, only provides a broad framework for dealing 
with the real possibility of a damaging spill. We expect additional 
detailed information under the general plan to be provided to us and 
the public within 12 months. Such information should include spill 
scenarios, equipment specifications, and dedicated budgets. All of this 
is essential for adequate analysis of the area-specific spill response 
plans that need to be in place well before first oil. We expect that 
such additional plans will be completed and released at least 6 months 
in advance, as stated in the Environmental Management Plan (EMP).
    11. The adequacy of funding has been of particular concern in two 
areas: the indigenous peoples plan, and the offset parks. With respect 
to funding for offset parks, we have not had, frankly, the kind of 
clarity and precision we might have expected--either from the Bank or 
from the project's critics. The latest material from the Bank gets us 
some way toward satisfaction, but we would all benefit from a detailed 
progress report in 12 months, especially as regards the size and 
adequacy of commitments by the Government of Cameroon.
    The adequacy of the design and prospective funding for the 
indigenous peoples plan is a matter of perhaps greater concern. It is 
clear that there are material social and cultural issues between the 
two largest affected population groups, and that there is a need for 
substantially better information and consultation. It may well be that 
this work confirms the design and funding deficiencies that have been 
asserted. The Bank needs to ensure that additional work is done, and 
done right, and that whatever deficiencies may emerge are rectified as 
a matter of priority. We would like the Bank to provide us with a 
detailed report within 6 months, and to include further detailed 
analysis as part of the full project report to the board we are 
requesting after 12 months.

                       SOUND USE OF OIL REVENUES

    12. The Bank deserves great credit for the effort it has put into 
the central issue of sound management by the Government of Chad of the 
oil revenues that will begin flowing in a few years. Given the 
management and governance challenges that clearly exist, together with 
now much higher public expectations of the Bank, it is fair to say that 
without these arrangements prospects for this project to garner 
international support would have been virtually nil.
    13. The establishment of the offshore escrow account and the 
subsidiary accounts for resources specifically earmarked for priority 
social investments, is an entirely appropriate mechanism given the 
risks. These are major steps forward toward dealing more effectively 
with what we all know to be the priority poverty reduction challenges 
in Chad. We also welcome the Bank's commitment to integrate these 
arrangements fully into its poverty reduction strategy process for 
Chad, and to treat both as an inextricably coupled whole. To do any 
less would be to defeat the aspirations of Chad's poor, and those who 
are willing to support this project despite its great risks. The 
preparation and public disclosure of comprehensive and regularly 
updated public expenditure reviews is essential to the process. We 
would appreciate assurances that this is indeed the Bank's intention.
    14. We regret that the revenue use issues for Cameroon have not 
been approached with anywhere near an appropriate level of ambition and 
seriousness. The Bank's recent, and admirably candid, CAS Progress 
Report should have erased whatever doubt might exist about the capacity 
and willingness of the government to make the choices and changes 
essential for any progress against poverty. Corruption is a huge 
problem. Priority investments are not being made to build the social 
resources needed for self-sustaining growth and equitable development. 
Assistance is being poorly used.
    15. We fully recognize that the additional resources we are dealing 
with here are of a different character and order of magnitude. But we 
also believe that the bank, and therefore we, have missed an 
opportunity here to do something materially different and materially 
better than business as usual. At a minimum we would expect the Bank to 
provide us, and the public, with comprehensive, periodically updated 
public expenditure reviews for Cameroon, as well. We also expect the 
Bank to ensure that future lending operations in Cameroon focus 
aggressively and specifically on these issues.

            MONITORING, REPORTING, AND PUBLIC PARTICIPATION

    16. The Bank is also to be commended for the numerous specific 
provisions it has built into these projects to increase the amount and 
quality of monitoring, reporting, and public participation. Many 
elements might properly become a basic model for the Bank and others. 
In other respects, however, further refinements and improvements in the 
currently envisioned arrangements should be pursued. And, of course, it 
will all be worth little without full and diligent implementation.
    17. We welcome the Bank's decision to establish a fully independent 
International Advisory Group (IAG) to monitor, assess, advise, and 
report on the full range of issues that will determine this project's 
success in translating oil revenues into poverty reduction. That said, 
we are not entirely clear on the form and frequency of the IAG's 
communications and interactions with the board and the public, nor on 
the nature of the board's operational relationship with the group. 
Clarification of these issues would be welcome.
    18. The establishment of an External Compliance Monitoring Group 
(ECMG) is another very positive addition to the array of oversight and 
monitoring mechanisms employed. We look forward to the opportunity to 
review the ECMG's Terms of Reference, and would appreciate 
clarification of the funding arrangements and reporting frequencies 
presently envisioned. The review process for the Terms of Reference 
should specifically include the engagement of civil society. Beyond 
this we fully expect the Bank to exercise its right to make ECMG 
reports public as a routine matter.
    19. The Petroleum Revenue Oversight and Control Committee is 
another vitally important monitoring and accountability mechanism. It 
will be imperative to ensure that its role is effective and its 
structure credible. Adequate membership by individuals not affiliated 
with the government is essential. So too is regular full reporting to 
the public. And finally, so too is an operational function that goes 
beyond simply acting as a conduit for revenues flowing from the 
external partners. As far as we can tell, however, on none of these key 
issues is there yet the clarity that we have been seeking for some 
time.
    20. The Bank's necessary engagement in monitoring goes well beyond 
effective interaction with these various entities. Its own systematic 
and comprehensive supervision is essential. We are pleased with the 
commitment to place two fully dedicated staff members on the ground and 
to allocate additional specialized resources. However, we question 
whether the provision of supervision resources--equivalent to about $1 
million per year--will be adequate. A rough estimate suggests that this 
will cover in the range of 4 to 5 staff years, including the dedicated 
country-based staff. Given the complexity of the monitoring and 
supervision issues, as well as the Bank's huge ongoing public exposure 
on this project, we seriously question whether this is adequate. The 
fact that the Bank's planned supervision arrangements may go well 
beyond what is typical offers no particular comfort. All considerations 
argue strongly that the Bank should err well onto the side of too much 
rather than too little supervision.
    21. We support the participation of Chad and Cameroon in WBI's 
integrated anticorruption/governance learning program, in collaboration 
with the Africa region. The participation of both Chad and Cameroon in 
this program, which combines indepth diagnostic tools with an action-
oriented, highly practical core course program, is constructive and 
critical, given the serious governance, corruption, and capacity 
challenges both countries face. As today's project documents 
illustrate--and the recent Cameroon CAS update note reinforces--both 
countries will benefit from a program that helps the governments and 
citizens develop serious action programs based on sound analytical 
work. We would appreciate confirmation from the Bank today that Chad 
and Cameroon have agreed to enter this program.

                               CONCLUSION

    22. As we said at the outset, we value and appreciate the time and 
effort the Bank and both countries have invested in this project. We 
also welcome the institution's and authorities' openness to the views 
of others and the willingness to make major changes in a project that 
has been under development in one form or another for over a decade. 
There is no question that the project is vastly improved, both 
conceptually and with respect to specific design elements, relative to 
where it was even 9 months ago.
    23. There is also no question that further improvements could and--
we would strongly urge--should be made within an overall structure we 
now regard as basically sound. Specific assurances from Bank management 
regarding these additional measures would be both appropriate and 
helpful, and we are prepared to support the project in that context.
    24. In conclusion, we would reiterate that every aspect of the 
Bank's engagement in this project will be under intense scrutiny--from 
us, from other institutions, and from a deeply skeptical public. The 
process leading up to today's discussion has not, to its credit, been 
business as usual. The process going forward absolutely must not be 
either. The record on implementing this project will directly shape our 
willingness to support additional Bank assistance for both of these 
countries going forward and for this type of project more generally. On 
a broader plane we must expect that it will also unquestionably be a 
prism through which the world views this institution and, it is likely, 
development assistance more broadly. The stakes could not be higher.

                                  
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