Don't bank on the Bank!

Published by MAC on 2011-01-17
Source: Nostromo Research

Extracts from World Bank Extractive Industries Annual Review 2010

January 2011

• IFC investments accounted for roughly 75 percent of the total [World Bank EI] financing volume, followed by MIGA with 16 and IBRD/IDA with 9 percent. WBG EI commitment volume has averaged $960 million per annum, over the last five fiscal years and has been between 1 and 3 percent of total WBG investment volume over the same period.
• Overall, both the mining portfolio and new investments in FY10 are heavily weighted in Africa with 58 percent and 45 percent of volume in this region, respectively. Latin America and the Caribbean follow in second place.
• The top countries for new investments were the Solomon Islands, Peru, Argentina, Zambia and Tanzania with US$108 million [editor's comment - well over half] of the total. In the portfolio, Ghana, Peru, Russia, South Africa and Mozambique dominate with US$ 869 million.

"While a small number of sizeable, new capacity investments in a few countries account for the bulk of the volume, total World Bank Group (WBG) new commitments were spread across more than 20-plus countries.

"In Financial Year (FY) 2010, new commitments in the mining sector, US$180.8 million, almost tripled compared to FY09. Equity investments have been consistently around 75 percent of new business over the last few years, as IFC has focused increasingly on supporting early equity investments - investments usually with smaller (junior) companies for projects at the exploration and appraisal/planning stage of mine development. This year, junior companies accounted for 62 percent of the total with the majority carrying out exploration in Sub Saharan Africa".

• What are the WB-IFC's criteria for "positive development - and how have they been fulfilled?

"By focusing on small, local and international players, IFC is aiming to have a significant impact early on by helping these companies to increase their capacity for the implementation of good practice environmental and social standards. In addition, smaller companies value IFC's country and sector knowledge as well as technical experience and expertise of how to move from exploration to development. As a long-term partner, IFC expects to support the possible future mine developments.

"Increasingly, the WB has structured its activities along the extractive industries value chain. This framework classifies the process by which countries transform their natural resources into sustainable development. The WB provides a variety of support across each stage, starting with technical advice, for example, on how to structure the award process for contracts and licenses, to supporting EITI and the transparent collection of taxes and royalties and helping governments managing fiscal revenues efficiently and implementing sustainable development policies. While the focus of any given WB project depends on the level of maturity of the recipient country's EI sector, it will normally encompass elements of most or all of the stages of the value chain.

"...The vast majority of IFC investments in EI have had notable positive development impacts. By number, 83 percent of the extractives portfolio has demonstrated positive results on the ground. If results are weighted by project size, the proportion of successfully developmental (sic) projects rises to 95 percent, accounting for the fact that big investments generally generate a broader impact.

"Extractives' investments have had the greatest developmental success in Latin America and the Caribbean where all projects have shown positive results, followed by the Africa region - where still 80 percent of IFC's investments have outperformed set benchmarks. 60 percent of the Middle East and North Africa portfolio generated positive development results.

"During the last reporting period FY2010, IFC's oil, gas and mining client companies contributed approximately US$6.9 billion to government revenues, created or sustained about 85,500 direct jobs and supported local communities with US$252 million through dedicated community related spending. Total spending by these companies on goods and services from local and national suppliers approached US$5.7 billion, demonstrating both significant linkages to local businesses and making a major contribution to local economies.

The expected development impact for new commitments in FY2010, include the generation of US$6 billion in taxes and other payments to government, national and local purchase of goods and services of US$4.8 billion as well as creation or maintenance of 11,500 jobs and contribution of US$36 million of community development outlays".

• IFC Oil & Gas investments outstrip that in mining - fourfold

"In FY2010, new capacity investments were heavily concentrated in the oil and gas sector with US$ 731.5 million, and US$180.8 million in mining. IFC financed the majority of new capacity oil and gas projects and all of the mining investments.

[4.21] In FY2010, South Asia accounted for 33 per cent of total oil and gas commitment volume with one large investment in India, Cairn India (1). In aggregate, India, Argentina and Brazil dominated FY2010 new business commitments. Regionally, the IFC oil and gas portfolio is concentrated in Latin America and the Caribbean Region with roughly US$1.1 billion, or 52 percent, followed by Sub Saharan Africa with US$312 million, or 15 percent of the total".

(1) Cairn India in 2010 brokered an agreement with Vedanta Resources plc, under which the notorious UK-listed mining company would take control of Cairn India's potentially lucrative share of Rajasthan's oil fields ([Editor's comment].

• Biggest single mining related commitment - Solomon Islands

"Mining investments were on average much smaller and more geographically dispersed. The biggest mining commitment was the rehabilitation and restart of an existing gold mine in Solomon Islands, where mining is seen as a source of diversification from the logging sector whose continued decline will have negative impacts on both economic growth, and the current account".

• MIGA - on its way out? (2)

"In recent years, MIGA's financing support in the form of providing political risk coverage to private investors has been relatively small but it continues to selectively support good EI investments".

(2)  In fact, there was there was only one MIGA (Multilateral Investment Guarantee Agency) commitment in FY2010 - and it was in oil and gas: Ghana's Jubilee offshore oil and gas project. Following concerted criticism of IFC-MIGA's role in insuring bad mining projects over the past twenty years (see for example The Risks We Run, International Books, 2005, it might be that this message has finally got through to the upper echelons of the Bank [Editor's comment].

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Dont bank on the Bank!

Nostromo Research

16 January 2011

During much of the period between the late 1970s and early 21st century, the World Bank was a prime target for campaigners who either wanted the "world's biggest development agency" to clear out of mining altogether, or demonstrate how its avowed mission, to promote sustainable development, squared with investing in some of the most destructive extractive projects around.

These pressures from campaigners - and above all, the resistances at a community level which they reflected - resulted in the Bank launching the Extractive Industries Review in 2001 under the direction of Emil Salim, a former Indonesian minister for the environment.

The WB board in summer 2004 rejected several of Salim's key recommendations - including a community's right to deny mining on its territory, rather than merely be "consulted" about it; and an immediate relinquishment of all Bank backing for coal.

Nonetheless, "thinking" in the Bank has inched slowly towards accepting the principles of Indigenous Peoples right to FPIC (Free Prior and Informed Consent).

And, although it has continued to throw money at coal-fired power projects (most notoriously and recently that of Eskom in South Africa), it has not directly financed any coal mine project over the past six years.

Lessons not yet learned?

As for Emil Salim's cogent analysis of the contradictions between much of the Bank's support for the mining sector and  betterment of peoples lives, the underlying justifications for it investment haven't radically changed.

In fact, as judged by this Review, it is now being directed largely at junior exploration companies whose past record (where it exists at all) has been of dubious quality, if not of actually causing damage.

Although the Bank's "new commitments" to mining are small  (and its entire mining portfolio is minor compared with that of the large commercial banks, hedge funds and sovereign wealth funds invested in the sector) the aggregate development effect claimed for such investment is at first sight impressive.

However, these claims derive from a set of statistics which fail to reflect the quality of life and livelihoods as measured by the Human Development Index (HDI) and especially the inequality-adjusted HRI (IHRI).

Ten-to-fifteen years ago, many critics of the World Bank called for its dissolution. Others demanded the Bank show how its investments (particularly in mining) squared with supporting people-determined, community-directed, sustainable development initiatives.

At the very least, the Bank was challenged to show that, if it invested in a "bad" project, its involvement had led to an improvement in that project's performance, and resulted in an accretion, rather than diminution, of the rights of those impacted by it.

The Bank has signally failed to do this, and  clearly still has not learned from the errors of its recent past.

But, unfortunately, opposition to the Bank's fundamental raison d'etre now appears largely to have dissipated, while fewer voices are being raised against the mining gambits that it sponsors.

"Tinkering"

Doubtless this is partly the result of the Bank's ceasing to prefigure mining as one of the most important weapons in its armoury. We're a far cry from its imposition of scores of revised, foreign investment-friendly, codes for developing countries during the 1980s, culminating in the Bank's 1992 "Strategy for Africa Mining Review" which set about stripping states of their nationalised mineral assets in favour of the private sector.

The terrible consequences of these older policies are now widely recognised - even within the Bank itself. Recently, for example, one of its spokespeople strongly criticised Zambia's government for failing to secure mining revenues from overseas-owned mining companies (though the Bank had earlier paved the way for privatisation of the country's state-owned ZCCM).

Yet it continues to "tinker" with the mining sector (particularly in Africa, as set out in the 2010 EI Review), clinging to assumptions long proved illusory.

Ironically, the Bank's apparent abdication from funding of "world-class" mines (with a few notable exceptions) should result in its escaping the scale of criticism it attracted until a few years ago. (Who's going to mount an international campaign to halt Allied Gold's Gold Ridge project in the Solomons? Probably no-one). On the other hand it can't claim, as it once did, to promote of better standards at a given mine by virtue of having a "strategic" investment in it.

Indeed, one wonders whether, by the time of its 2012 EI Review (especially if the current commodities' boom has thoroughly "bubbled out" by then), there'll be much left of the Bank's investments in mining from which it can extract any lessons at all.

[This commentary by Nostromo Research does not necessarily reflect the views of any other party, including the editors of the Mines and Communities website. Reproduction is welcomed, so long as full acknowledgment to Nostromo Research is provided].