[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
__________
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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
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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.
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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.
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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.
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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.
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\3\ Operations Evaluation Department, ``Extractive Industries and
Sustainable Development--An Evaluation of World Bank Group
Experience,'' Washington, DC, 2003, p. 7
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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.
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\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.
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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.
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\5\ Recommendation contained almost verbatim in the World
Commission on Dams final report, 2000.
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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.