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World: WB to Work on Oil, Gas and Mining Projects

Financial Times
February 26th, 2004

Later this month, James Wolfensohn, the president of the World Bank, and his management colleagues will have to make one of the easier but less popular decisions of their careers.

Barring an extraordinary last-minute reversal of their draft proposals, recently leaked to the Financial Times, they will reject several of the crucial recommendations of a review about the extractive industries - oil, gas and mining - they themselves instituted. In particular, they will oppose the idea that the Bank should phase out all oil projects within five years.

Their recommendation will almost certainly be accepted by the Bank's executive board, which recently voted to support the Baku-Tbilisi-Ceyhan oil pipeline between the Caspian and the Mediterranean against the vociferous complaints of environmental activists.

The fact that the bank's management has forced itself to make this decision shows the widespread influence of the fashionable concepts of "partnership" and "stakeholding" - the idea that governments, business, international institutions and lobby groups can join together to forge a common purpose. But the fate of the Extractive Industries Review, and of some of its predecessors, shows that the practice has found it hard to resolve issues over which there are deep divisions.

The vogue for stakeholder consultations, a product of the 1990s, was imbued with the glowing optimism of globalisers during that era. The dream was that non-government organisations and corporate executives could establish practices that would capture financial returns for companies and social returns for the poor. The reality, however, has proved more mixed. Some of the first attempts at partnerships and consultations, such as the World Commission on Dams, ended in disillusionment (see below).

So when the bank promised a consultation about its work in the extractive industries, it was hugely significant. Oil, gas and mining, which affect some of the poorest and worst-governed nations on earth, rivals dam-building for intense controversy. NGOs interested in the issue include mainstream organisations concerned with human rights, poverty, corruption and corporate accountability, such as Amnesty International, Global Witness and Oxfam.

One argument made by many NGOs and some academics is that extractive industries in poor countries do more harm than good by entrenching a destructive and predatory elite. On the other side is the view, held by many in the Bank, that international support and monitoring ensure that the revenues generated from the industries can be harnessed for the poorest. Indeed, the Bank's involvement in another high-profile project, the Chad-Cameroon oil pipeline, has led it further down the road of intervening between governments and their citizens by demanding openness and accountability in how revenues are spent.

The World Bank and its private sector arm, the International Finance Corporation, have become a battleground in this dispute. It is true the amount of money the Bank spends on oil and gas projects is relatively small - the IFC, for example, will provide just 10 per cent of the cost of the Baku-Tbilisi-Ceyhan pipeline. But the Bank's seal of approval is eagerly sought. Meeting its "safeguard" standards on the environment and governance earns international respectability. Moreover, many national export credit agencies, whose financial support can be essential for western companies to get involved in high-risk, long-term projects, condition their participation on World Bank approval.

The very creation of the EIR created trepidation. Announced by Mr Wolfensohn during a meeting with NGOs at the Bank's annual meetings in Prague in 2000, the decision at once caused consternation among some Bank officials.

Initially, NGOs were content. But when it emerged that, rather than seeking consensus among a diverse commission, the process would hinge on the opinion of a single "eminent person", they too became alarmed. The person the Bank chose to be the sole arbiter was Emil Salim, an Indonesian former environment minister who served under the brutal dictatorial regime of President Suharto.

NGOs were instantly suspicious, and contended that the Bank had created a sham process over which it would exert backstage control. Their suspicions were strengthened when Bernard Salome, a Bank official seconded to work in the project's administrative department, made it clear that he intended to prevent NGOs from dominating the review.

"The spin from Salome was that the World Commission on Dams' problem was that the Bank wasn't brought into the process," says Steve Kretzmann, campaign co-ordinator for the Sustainable Energy and Economy Network, part of the left-leaning Institute for Policy Studies think-tank in Washington DC, who was deeply involved in campaigning on the EIR. "I took that as saying the Bank didn't agree with the WCD and wasn't going to let it happen again."

A series of five regional consultations around the world at which NGOs would be allowed to make their case was planned but one activist recalls Mr Salome saying: "My strategy is to bury you in paper." And at the Asia-Pacific workshop in Indonesia, local NGOs staged a walk-out, saying, as Mr Salim put it: "This whole review is just a disguised World Bank public relations stunt."

But for those NGOs that stuck with the process, Mr Salim's ear was open. A pivotal moment came when an early draft of the report, sympathetic to the oil and mining industry, was leaked. This provoked swift changes, not least the departure of Mr Salome. Robert Goodland, an environmental consultant and adviser to Mr Salim, who worked on the review, says that Mr Salome was forced to resign when it became clear that he was giving the Bank's input an unfair advantage. (Mr Salome has not returned e-mails or calls asking for comment since his resignation.) n the end, the final report gave the sceptics of the benefits of extractive industries almost everything they wanted. While the report accepts that extractive industries can contribute to poverty alleviation, it also says the World Bank is not ideally placed to help them. More dramatically, it recommends that, to combat climate change, the Bank should pull out of oil projects in five years, end the funding of coalmining and quickly ramp up lending for renewable energy. It should also require "free prior and informed consent" - a stringent legal test - from local indigenous peoples before funding any extractive project.

Industry and governments flatly rejected the conclusions. "We do not believe that a blanket prescription to phase out engagement by 2008 is helpful," said Hilary Benn, the UK's international development secretary, in a letter sent to Mr Salim after the final report in December.

The International Council on Mining and Metals, a coalition of companies, said bluntly: "ICMM considers the EIR recommendations to be costly, unproductive and unrealistic."

A coalition of oil company executives, including officials at Shell and BP, rejected the report in a a statement that called some of the recommendations"overly prescriptive".

In such a contentious area, some disagreement is inevitable; but the disputes raised fundamental questions about just how such a consultation could bring such disparate views together.

For one thing, the review placed tremendous weight on the judgment of the eminent person. Mr Salim was considered by some participants as a loose cannon. In early drafts, he made sweeping criticisms of the Bank's approach to "structural adjustment" - economic reform - outside the field of extractive industries.

In October Sharon White, policy head at the UK's Department for International Development, sent a sharply worded letter to Mr Salim. "It is not the Bank's role to start 'formal acts of acknowledgement and contrition for the wrongs done to indigenous communities (from) centuries of European colonial expansion'," she said

.

Mr Goodland, however, defends Mr Salim. "When you give an independent group or person the remit to examine an issue, you can't control what they look into," he says. But even he admits Mr Salim would swing back and forth, apparently according to who had been lobbying him last. "Sometimes you would get a new draft from him and there would suddenly be something very positive about the nuclear industry in there, and it was clear whom he had just been talking to."

As late as September last year, an independent advisory group convened by Mr Salim complained that the draft report failed to tackle the central question of the review: whether extractive industries could contribute to poverty alleviation.

Some participants also said that Mr Salim's rationale for suggesting that the Bank pull out of oil and gas - the effect on climate change from carbon emissions - was another departure from the review's remit.

Sir Mark Moody-Stuart, chairman of the mining company Anglo-American, former chairman of Shell and a veteran of many such partnerships, says: "I consider the job of an adviser is to give advice which might be adopted. Giving extreme advice which will be rejected is not doing your job."

Mr Salim defends both the report's conclusions and the way they were reached. The review "provides the eminent person the opportunity to draw conclusions on the basis of his conviction and conscience, without feeling the necessity to compromise with others, sacrificing thereby his principles, which is normally the case in commissions", he said in an e-mail interview. he philosophy underlying stakeholding is to search for consensus, to allow participants to learn from each other and to reduce divisions caused by misunderstandings of the opposing view. Some parties felt this had, at least in part, been achieved.

Rashad Kaldany, director of the Bank's oil, gas and mining division, defends the review. "What has been surprising for me is how much people agree on," he says. He also says he learnt that the Bank had to "work harder in telling local people what we are doing".

But a large part of what seemed to divide NGOs, governments and bank staff during the process was not mis-understandings. It was a stark, fundamental disagreement about the ability of oil, gas and mining to better the lives of the poorest people in the world.

Many activists believed that an open-minded investigation had concluded that they were right and their opponents were wrong. Mr Kretzmann says: "Throughout the whole process, there was no credible evidence that the extractive industries could contribute meaningfully to reducing poverty."

The Bank management's challenge now is to adopt enough of the recommendations to be acceptable to its shareholders and staff without losing the legitimacy conferred by the NGOs' approval. Mr Kaldany says: "There is a responsibility to take seriously all the recommendations. There is also a responsibility on the side of civil society (NGOs) to say: we understand this is a complex set of issues and you may not agree to everything."

But he says NGOs are unwilling to compromise. "It is very clear the message we are getting is: we want you to adopt everything or else."

Mr Kretzmann confirms this. "Implementing the EIR as a whole is a litmus test for the Bank's sincerity in a stakeholder engagement," he says.

With such opposed views, the final outcome is unlikely to bring dissenting voices much closer together. When the lowest that NGOs want to go is way above the maximum that governments are prepared to give, even the most elaborate consultative processes will struggle to bridge the gap.

Sir Mark Moody-Stuart says consultations can have some value, citing a range of examples such as the voluntary principles on security and human rights, a joint initiative of the US State Department, the UK Foreign Office and NGOs that drew up guidelines for companies that use armed security. Discipline, he says, is vital to making consultations effective. "You need to have a broad representation and define the question narrowly," Sir Mark says. Those principles were not adhered to in the EIR. "Focusing it on the extractive industries and poverty eradication was a well-defined narrow objective. But then we went off into climate change and structural adjustment."

Herman Daly, a former World Bank economist and professor of public affairs at the University of Maryland, who joined Mr Salim's advisory panel towards the end, says the review produced real debate and some reasonable recommendations.

But, he adds: "The consultation is based on a woolly concept of stakeholding. Stakeholders are interested parties. But you ought to have a representation of disinterested parties. If there are no disinterested parties, you can forget the whole thing."


The difficult search for global standards

The Extractive Industries Review is not the first attempt by a stakeholder consultation to set global standards in an intensely controversial area.

The trail was blazed by the World Commission on Dams (WCD), a two-year project that brought together hydrologists, industry representatives and environmentalists to debate a contentious development issue. In 1993, the World Bank withdrew from the Sardar Sarovar dam system on the Narmada river in India after pressure from local and international campaigners.

The WCD report, largely sceptical of big dams and containing guidelines for environmental and social consultation, was launched by Nelson Mandela in a London ceremony in November 2000. The commission attracted some unusual support: Medha Patkar, the leader of the local campaign against the Narmada dam, took part in the process and signed its conclusions, though with a dissenting addendum.

But the commission ended in impotent recrimination. It became clear that its recommendations would not be widely enforced. The bank itself did not commit to following all the guidelines. Several governments, notably China's and India's, declined to pay them any heed. "If the bank had accepted the commission report completely, many arguments could have been avoided," Ms Patkar says. But adopting the stringent standards of the WCD would probably have meant even more dam projects going ahead without the bank's involvement, as both the Sardar Sarovar in India and the Three Gorges dam in China have done.

The World Bank has a penchant for consultations because of the nature of its work, and the desire of James Wolfensohn, its president, to bring civil groups closer to the institution. Another example was the "structural adjustment participatory review international network", a four-year consultation conducted by NGOs and local academics in developing countries. It was billed as a fresh look at structural adjustment - the reform agenda that generally includes privatisation and trade and economic liberalisation.

But there was little doubt about what it was likely to conclude when it reported in 2002. The secretariat was led by two brothers, Doug and Steve Hellinger, of the Development Gap - whose mission is "to educate US policymakers, the media and the public about the economic reform measures . . . causing ecological and economic devastation in the South".

Unsurprisingly, the review concluded that structural adjustment had been a disaster, contributing to poverty and inequality. Equally unsurprising was that the bank, to the disappointment of the report's authors, declined to change course.





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