Extractive Industries Review (EIR) Recommendations to the World Bank

Changes Required to World Bank Lending for Extractive Industries

Posted: 16-Apr-2004; Updated: 16-Apr-2004

Over the two following years, the Extractive Industries Review (EIR) consulted with many stakeholders, including representatives of civil society, labor, industry, and governments. The Secretariat held regional consultations in Latin America and the Caribbean, Africa, Asia-Pacific and Central and Eastern Europe. The EIR also conducted independent research analyzing the social and poverty impacts of the extractive industries. Throughout the process, the World Bank Group was an active participant in the EIR.

In January 2004, Dr. Salim presented President Wolfensohn with the Extractive Industries Review Final Report: Striking a Better Balance. [To view the report and summary of the recommendations, including Spanish, French and Russian translations, go to www.eireview.org.] The review recommends, among other things, that the World Bank Group:

• Strengthen governance systems before investing in extractive industries;
• Refuse to support extractive industry investments in situations characterized by conflict, oppression or systemic corruption;
• Adopt a rights based approach to development;
• Promote transparent revenue management and just revenue sharing;
• Obtain the free prior and informed consent of indigenous peoples and local communities before financing an extractive investment;
• Increase support for renewable energy by twenty percent per annum;
• Adopt all four core labor standards and support workers laid-off by mine closings; and
• Strengthen or adopt a wide range of social, environmental and information disclosure policies

The World Bank Group is now developing its response to the review. In mid-April, World Bank President Wolfensohn will meet with Dr. Salim to discuss the Bank Group's response to the recommendations. World Bank management will propose a more formal response to the Committee of Development Effectiveness (CODE), a subcommittee of the board of directors, in May. A final decision from the Board of Directors is expected in June or July.

Common Questions About the EIR's Recommendations

1. Isn't World Bank involvement in extractive industries better because it improves social and environmental performance of these projects?

There is no empirical data to support the argument that Bank-funded projects perform better on social and environmental issues than comparable projects that do not have Bank funding. Indeed, many Bank-supported extractive industries projects have had serious problems (e.g. Yanacocha Mine in Peru or the Chad/Cameroon Oil Pipeline). Moreover, the Bank's own internal auditors have concluded repeatedly over the years that the Bank does not adequately enforce its social and environmental policies in its own projects.

2. Won't these projects go forward anyway? If so, isn't it better to have the World Bank involved?

There are some projects, such as Chad/Cameroon oil pipeline, which are unlikely to go ahead without Bank involvement. In such cases, the Bank may be enabling projects that will not deliver on the institution's poverty reduction goals. During the EIR review process, the World Bank was unable to provide a clear example where poverty was alleviated as a direct result of one of its investments in the extractive industries. But the real issue is what the World Bank is doing with its limited financial aid. Investing in projects that are moving ahead anyway in the private sector, or developing projects with a clear poverty reduction results? Given reduced overseas development assistance available today, the Bank should use its investments wisely, and leverage investments with clear benefits for the poor.

3. Does the EIR recommend that the World Bank have no role at all in countries with poor governance Governance is considered in the EIR report to include transparent and sound revenue management, sound economic management, rule of law, effective legislative frameworks including social and environmental regulations and local revenue sharing, monitoring mechanisms, functioning government agencies, monitoring and participation mechanisms and respect for labor standards and human and indigenous peoples' rights?

No, the EIR recommends that extractive industry investment, not all investment, be conditioned on the governance situation in a country. The EIR concludes that "pro-poor governance" is a necessary enabling condition for extractive industries to ever be compatible with the World Bank's poverty alleviation mission. Similarly, the Operations Evaluation Department (OED), the internal evaluation arm of the World Bank, recommends that the type of financial support for a country be tailored to the governance conditions prevailing in the country. In countries with poor governance, the OED concludes that new extractive industry investment will not lead to positive development outcomes. The EIR does not address or rule out World Bank investment in other sectors, as that is outside its mandate.

4. Does the EIR recommend that the World Bank should wait until a country has "perfect governance" before investing in any extractive industry activities?

No, the EIR recommends that support for extractive industry investments be tailored to a country's specific governance situation and its development needs. The EIR recommends focusing first on governance to ensure adequate governance conditions supportive of positive development outcomes, but the EIR does not set specific benchmarks for what constitutes adequate or "perfect" governance. Rather, the EIR calls for a transparent multi-stakeholder process to determine the indicators of adequate governance, and outlines areas that should be included in a governance assessment.

5. Does the EIR conclude that there should be no investment -- private or public-- in oil, gas and mining in developing countries?

No, the EIR was established to examine the role of the World Bank Group in extractive industries, and as such the EIR's recommendations pertain to the World Bank Group. Furthermore, unlike private investors, the World Bank is charged with an institutional mandate to reduce poverty. Therefore, assessing the worthiness of World Bank support for an extractive industry investment requires evaluating whether the Bank's financing could deliver greater poverty alleviation benefits through other types of investments. It could be argued that some of the EIR's recommendations, regarding the use of certain technologies and policy safeguards, set new best practice standards for the industry.

6. The overall amount of World Bank investment in extractive industries is relatively small. Is this really significant then?

It is true that investment in the extractive industries has been on a general decline over the last few years, but the share of support for investing in the private sector through IFC and MIGA has increased. In some regions, like Africa, investments in extractive industries representative the vast majority of that continents development support. Regardless, the World Bank Group sets the standards and best practice for the extractive industries globally. Even if the direct investments are a small percentage of the World Bank's overall investments, the approach the World Bank adopts will have a ripple effect beyond its own direct investments.

7. Why should the World Bank follow the EIR recommendations when there wasn't consensus around all of the issues?

The process was never designed to be a consensus based process. With as many divergent participants and points of view, it would never have worked successfully as consensus based process. The World Bank designed a consultative process, with some analysis and recommendations, which is what the EIR report provides. Furthermore, there have been consensus based processes, such as the World Commission on Dams, where the World Bank did not follow those recommendations either.

EIR Recommendations Summary for Adoption by World Bank Group

The Extractive Industry Review (EIR) recommendations are meant to address the failure of investments in the extractive industries to improve conditions for the poor and local communities, indigenous peoples, and the environment or to protect basic rights. If the World Bank Group is serious about improving poverty conditions and benefits for communities, then these recommendations must be viewed as interlinked, and not a menu of options. For instance, one cannot separate measures to protect basic individual rights from measures to establish better governance systems.

Similarly, these recommendations require the World Bank Group to respond as one institution since each of its arms -- IBRD, IDA, IFC and MIGA -- support the extractive industries through a variety of mechanisms. We are looking to the World Bank Group to take a serious and comprehensive approach to the EIR recommendations and adopt them fully and in a timely fashion.

These recommendations call on the World Bank Group to:

Governance

• Strengthen governance first so that countries are able to withstand the risks of major extractive developments. Develop explicit governance criteria, transparently and in a participatory manner, which should be met before investments for the extractives industry.

Pro-Poor Policies

• Help client countries assess the advantages and disadvantages of the oil, gas, and mining sectors compared with other development options and undertake a comprehensive options assessment before a project is supported.
• Support projects that benefit all affected local groups, including vulnerable ethnic minorities, women and the poorest.
• Provide an equitable share of the revenues to local communities.
• Ensure that poverty reduction plans are in place prior to project start.
• Support projects with voluntary resettlement and resettled groups must be substantially "better off."
• Ensure that public health services associated with projects are available to all in the vicinity.
• Require health impact assessments to be conducted during project preparation.

Human Rights and Indigenous People

• Develop system-wide policy integrating human rights into the Safeguard Policies and establish a human rights unit.
• IFC/MIGA should assess human rights records of sponsor companies prior to involvement.
• Endorse and comply with all four core labor standards.
• Ensure that borrowers and clients engage in consent processes with indigenous peoples and local communities directly affected by oil, gas, and mining projects, to obtain their free prior and informed consent.
• All agreements with indigenous people and affected communities should be covenanted in project agreements/contracts.
• Ensure that the revised Indigenous Peoples policy is consistent with international law and agreed upon by consensus of Indigenous Peoples.
• Convene a legal roundtable discussion prior to approval of new indigenous peoples policy.
• No support for extractive industries in areas of conflict or at high risk of conflict.
• Ensure that local grievance mechanism is in place for all extractive industry projects.

Environment

• Increase support of renewable energy lending by 20% annually.
• Ban the use of riverine tailings and suspend all support for projects with submarine tailings pending outcome of independent studies.
• Develop tailings criteria and should revise its cyanide guidelines to be more consistent with UN, EU guidelines and minimize support for mines using toxins, like cyanide, and promote safer substitutes.
• Clarify ban on financing of extractive industry in protected areas as defined by UN, Natural Habitats Policy, or as designated by national or local governments.
• Use safe, modern and well run vessels to carry oil or hazardous cargoes.
• Establish clear guidelines on mine closures and condition financing on the set-aside of sufficient closure funds, which should be "ring-fenced" even after the World Bank Group's exit.
• Emergency response plans should be in place at project outset and conform to best practices.

Disclosure and Transparency

• Disclosure of (revenue) payments on company and government level.
• Vigorously pursue revenue transparency at country and company level.
• Disclosure of project contracts and agreements, like IPAs, HGAs, PSAs, PPAs; monitoring documents, economic, financial, environmental and social assessments.
• Environmental and social obligations should be covenanted in loan and project agreements and those should be disclosed.
• Documents should be made available in local languages, in a timely and culturally appropriate manner.
• Produce and disclose a net benefit analysis for all projects.
• Establish an information ombudsman to oversee application of the disclosure policy and decisions about confidentiality.

Institutional and Procedural Change

• Phase-out support for oil by 2008, and formalize its moratorium on lending for coal projects immediately.
• Require comprehensive Environmental and Social Impact Assessments, including health impacts, for all policy lending affecting the extractive industry sectors in countries with significant EI or anticipated growth in EI sectors.
• All extractive industry projects should be classified as Category A except where there is a compelling reasons to the contrary.
• Create staff incentives to ensure safeguard policy compliance and achieve poverty alleviation impacts.
• Increase the number of staff trained as human rights, social, environmental specialists.
• Involve environmental, social, human rights and poverty specialists early in project cycle.

 
Find Out More

• Take Action! Support World Bank Action Against Global Warming
• World Bank's EIR web site, www.eireview.org
• Petition to World Bank Head James Wolfensohn from European Parliament, Others on Extractive Industries Review (EIR) Recommendations (pdf file)
• European Parliament Resolution on the World Bank-Commissioned Extractive Industries Review (pdf file)
• For more information on multilateral financing go to www.environmentaldefense.org/go/worldbank