World Bank Should Revamp Loans to Mining Schemes


By Emad Mekay

Inter Press Service
April 2, 2003

The World Bank should revamp its lending policies for mining, oil and gas projects to avoid corruption, mismanagement and poor economic performance spreading in countries that rely on such industries, says a confidential study by the Bank's internal review body. The draft suggestions, obtained by IPS, say that although a few countries have generated higher incomes by exploiting such resources, a wealth of natural resources is "more often associated with poor economic performance".

The report by the Bank's independent body, the Operations Evaluation Department (OED), reviewed World Bank assistance to extractive industries (EI) in Chile, Ecuador, Ghana, Kazakhstan, Papua New Guinea and Tanzania from 1993 to 2002. It concludes that the Bank's push to finance investment and encourage private sector participation in such industries is more likely to "lead to bad development outcomes when governance is poor" for "many if not most of the Bank's clients".

The report criticises the Bank for inadequately analysing the risks and benefits of such investments in light of the poor quality of governance in those countries. "The Bank should not support increased investment in countries whose governments lack the capacity to benefit from or manage such investment," it says.

Although the report falls short or recommending the Bank stop financing such projects, it suggests that the Washington-based institution tie funding for the projects to how a borrower controls revenues and standards in the industry. That means the Bank should encourage borrowers to regulate environmental impacts and involve local communities in decision- making, adds the 60-page report.

Projects must also include independent audits of environmental impacts and specific provisions for community participation, development and local compensation when necessary, says the OED. It cites Ghana's 1998 Mining Sector Rehabilitation Project, whose objectives were to attract private investors and support small-scale mining of gold and diamonds. But the Bank devoted "minimal attention'' to environmental issues, according to the OED, which also noted that increased private investment in mining led to social conflicts within affected communities, degraded environments and signalled the need for safety monitoring. Villagers from Ghana's western gold mining region have previously complained that mining operations have not been as beneficial as originally promised and that the environment was degraded because of cyanide emission from the mines.

Local communities elsewhere, supported by activists, have grown increasingly suspicious of other extractive industries' projects. In a referendum Mar. 24, residents of Esquel, a town of 30,000 people in Argentina's pristine Patagonian region, voted down a proposal by U.S.-based Meridian Gold to dig an open-pit gold mine less than seven kilometres from their homes. Around 80 percent of voters rejected the project citing concerns for the possible negative impact on the region's lively eco-tourism industry, trout fisheries, agriculture and added pressure on already scarce water supplies.

Non-governmental organisations (NGOs) also report that resource governance problems have been reported recently in Algeria, Angola, Azerbaijan, Chad, Congo-Brazzaville, Democratic Republic of Congo, Equatorial Guinea, Gabon, Kazakhstan, Nigeria, Sudan and Venezuela.

The OED report comes after years of assertions by anti-poverty and other civil society groups who say that developing countries whose economies depend on oil and mining suffer from environmental damage, involuntary resettlement and increased corruption, violence and, at times, war. Some groups have lobbied for the Bank, the world's largest public development agency with a lending volume of 19.5 billion dollars in 2002 and a mandate to reduce world poverty and sustain development, to back away from financing these controversial sectors.

"The report presents a very direct and fundamental challenge to the Bank's current extractive industries operations in developing countries with poor governance," says Steve Herz, international policy analyst with the environment and development group Friends of the Earth. "It'll be interesting to see whether the Bank would appropriately enact fundamental reform in the sector as a result or will continue with business as usual."

World Bank economists have traditionally argued that extractive industries often increase government revenue, create temporary employment, infrastructure construction, technological innovation, and stimulate growth in related sectors. The Bank says that small-scale mining provides employment for some 13 million workers and their families worldwide, mostly in Brazil, Tanzania, Burkina Faso, Ghana, India, Indonesia, and China. Mining also provides the energy for economic growth in countries with large coal resources, such as South Africa, India, and China, it adds.

Yet the Bank bent to NGOs' criticisms and the World Bank Group - made up of the Bank, its soft-loan International Development Association, private-sector affiliate International Finance Corporation, and insurance wing Multilateral Investment Guarantee Agency - said it would review its role in extractive industries.

Friends of the Earth has called on international financial institutions (IFIs) like the World Bank to phase out their credits for oil and mining projects because lending practices in these sectors have failed to end poverty and "often entrenched corrupt and dictatorial governments". The group estimates that these lenders committed 55 billion dollars to oil and mining projects between 1995 and 1999.

Activists argue that extractive sectors tend to be capital-intensive and use little unskilled labour and as a result, do little to help the poor or the employment rate. They also contend that such industries are geographically concentrated and consequently create small pockets of wealth that typically fail to spread.

Instead, the groups suggest that poor states avoid export-oriented extractive industries altogether and work to develop agricultural and manufacturing industries. They also urge IFIs to only support oil and mining projects in democratic countries committed to using revenues to reduce poverty and increase transparency and economic diversity.

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