The IFC, Forests and the PanAfrican Paper Mill in Kenya

Posted: 14-May-2001;

Source: [Korinna Horta , Environmental Defense, May 14, 2001]

The World Bank is currently reformulating its operational policy on forests. As part of this process, the International Finance Corporation was required to carry out an evaluation of how the World Bank’s private sector lending operations had implemented the existing Forest Policy of 1991. This policy, which applies to the entire World Bank group, broke new ground on several fronts. It committed the World Bank to take a multisectoral approach. This means that the Forest Policy does not only apply to forestry projects, but to all World Bank lending with the potential to affect forest, such as investments in infras-structure development and economic policy reforms. In addition, the 1991 Forest Policy promised a highly participatory approach and work directly with local communities, NGOs and forest dwellers. The emphasis was to be placed on alleviating poverty.

Did the IFC implement this policy in its support for private sector operations? According to the report by the IFC’s evaluation unit, the Operations Evaluation Group (OEG), the IFC did not disseminate the forest policy requirements to operational staff nor did it reflect these requirements in its operational manual or project screening and appraisal guidelines. Furthermore, the OEG report found no evidence that the private sector companies benefiting from IFC support were informed about the applicable environmental policies and guidelines. However, the IFC’s technical staff claims that the environmental requirements were always discussed informally with the private sector companies and that relevant documents were handed to these companies, also in an informal manner, during project appraisal. A large part of the IFC forest-related investments are made via financial intermediaries. It is disturbing that, according to the OEG, environmental due diligence is left to the financial intermediaries and the financial institutions in charge of sub-projects which are not even. required to report on each of the operations they were funding with IFC support and IFC monitoring has not been adequate. As a result, the OEG acknowledges that there is a lack of knowledge of the environmental performance of the IFC-supported intermediary financial entities carrying forest-related operations.

Despite of these failures and omissions, the case studies carried out by the OEG in the contetx of its evaluation report found that all the projects had substantially or fully achieved the objectives of the 1991 Forest Policy. The case studies cover 14 forest-based companies and about $ 400 million in IFC investments, However, in order to protect the companies involved, the report does not state the names of the projects, the companies or even the names of the countries in which the case studies were carried out. Amongst the unidentified case studies is an African project which receives some of the OEG’s highest rankings in terms of enhancing the environment and reducing poverty. While neither country, nor project were made public, subsequent NGO-research revealed that the project in question is the PanAfrican Paper Modernization project in Kenya which first started operations with IFC support in 1974. In 1996 the IFC injected another $ 15 million into the project and now owns almost 25% of its shares. Clearly, the requirements of the 1991 Forest Policy did apply to this investment.

Despite the potential environmental impacts concerning plantation establishment, liquid effluents, air emissions, sludge and solid waste disposal, the project did not benefit from a full environmental assessment. The IFC’s Environmental Review Summary simply stated that the project was designed to meet all applicable World Bank policies, and environmental, health and safety guidelines.

The PanAfrican Paper Mill is located at Webuye in the Western Province of Kenya on the banks of the Nzoia River which drains into Lake Victoria. The company supported by the IFC is a subsidiary of Orient Paper and Industries, Ltd. of India.

In recent years, there have been numerous reports in the Kenyan press about the project’s severe environmental impacts on human health, livestock, water and soils. For example, the East African Standard reports that local residents accuse the paper mill of having turned a vast area of countryside into an environmental wasteland and of being an economic and social burden. Pollution of the Nzoia River on which residents depend for their water needs is so severe that bathing in the river has become a health hazard and animals drinking the water die. As a result of the chemicals produced during pulping, the area around the mill is enveloped in foul smelling air. Acid fumes and fly ash are resulting in the corrosion of the corrugated iron roofs of the houses in the vicinity of the mill. In addition, the mill’s solid waste, which is dumped on fields as manure, has led to a decline in local agricultural production. At the time of the establishment of the mill, the Webuye area used to be a heavily forested and formed part of the Kagamena Indigenous Forest. The mill’s demand for wood has turned the area barren and the company trucks now have to travel for over one hundred miles for raw material. The local labor component is minimal and mostly restricted to casual laborers working under conditions which puts their health at serious risk (East African Standard , September 13, 1999). Given the severity of the situation, Kenya’s environment minister established a pollution monitoring group in an attempt to get the company to adhere to environmental protection measures (Daily Nation, October 28, 1999). Subsequently, local residents have appealed to the environment minister to be part of the monitoring committee because they are so severely affected by the pollution (Daily Nation, 5 November 1999). Webuye is now viewed as a “sick town”. An investigative report by the East African Standard provides detailed information on the mill’s environmental impact based on government reports, local observation and interviews with the directly affected population. According to the report, information provided by local hospitals indicate that 60% of the children between the ages of 1 and 5 have developed breathing problems over the past 20 years and scores of residents complain that the pollution from the mills is ruining their health (East African Standard, September 13, 1999).

Has the IFC investigated these claims and found that they were not reflecting the environmental reality on-the-ground? Did the IFC’s evaluators study these problems before they concluded that the project had achieved poverty reduction beyond expectation?

According to members of its own staff, the IFC is often in a conflict of interest situation between protection of the environment and the economic interests of the private sector companies in which the IFC is a shareholder. For example, measures to address market failures in the forestry sector run directly counter to the interests of the IFC as an investor/ shareholder in private sector companies. Low stumpage fees are widely considered to be a major impediment to more sustainable forestry practices. However, the companies supported by the IFC profit from the low stumpage fees and the general lack of proper valuation of forest resources.

These potential conflicts of interest must be addressed. The IFC, like the rest of the World Bank, must establish institutional mechanisms, incentives and penalties, to ensure that environmental policies are followed in the design and implementation of projects. Local participation, effective poverty alleviation and ecological sustainability are all part of the policy guidelines. The fact that the IFC plans to massively increase investments in plantations for pulp and paper in the Southern Hemisphere where fast growing tree species mature in 6 to 20 years as compared to over 80 years in regions such as Canada and Scandinavia, lends special urgency to the necessary institutional reforms.
The IFC’s evaluation unit’s role must be to monitor the institution’s operational practices. This, however, must be done in an open and transparent fashion. Case studies without names and country of location lack credibility.