International Financial Institutions
(IFIs) are multilateral development banks
and export credit agencies that offer
loans, investment and guarantees for
projects and programs with the stated aim
of helping developing countries alleviate
poverty and attain sustainable development.
Funds come from member countries that
invest public money from their development
budgets into the operations of these banks.
The mandate of multilateral development
banks is to eradicate poverty and
contribute to sustainable development,
while export credit agencies were
established in order to support
corporations from industrialized nations
doing business in developing countries and
emerging markets. All IFIs are public
agencies, and as such should put their
money in public goods, in line with the
commitments of sustainability made by the
countries that govern them.
International Financial Institutions
have been funding fossil fuel projects and
mining for decades. Between 1995 and 1999,
IFIs channeled some US$55 billion to the
fossil fuel and mining sector.
Whereas IFIs originally supported mostly
state-led activities, their focus is
increasingly shifting toward private sector
development.
“The project will constitute a
breakthrough by providing a unique
opportunity for economic development and
therefore create conditions for long-term
political stability.
Chad
will receive substantial direct
benefits from the project in terms of
incremental fiscal revenues and foreign
exchange. (...) For
Cameroon
, the project will also provide
significant similar direct development
benefits, generating annual revenues
equivalent to some 3% of its current
budgetary revenues. In addition, the
project will have a catalytic impact on
local business growth in both countries,
which will lead to increased economic
activity, and generate other indirect
benefits (...).”
The European Investment Bank on its
approval of a US$144 million loan for the
Chad-Cameroon pipeline project in June
2001.
“Again and again, natural resource
windfalls have financed presidential planes
and palaces and entrenched official
corruption, while producing very little in
the way of lasting economic benefits.
Countries with the windfall external
finance provided by abundant natural
resources, such as
Nigeria
,
Venezuela
,
Burma
and
Zambia
have failed to progress economically –
indeed, in several cases, have fallen
back.”
Lawrence Summers, US Treasury
Secretary, Remarks to the Council on
Foreign Relations, March 1999. public
sector: attracting dirty business
International Financial Institutions
have been instrumental in setting the
development agenda for many countries
across the world. They exert heavy pressure
on governments to adopt structural
adjustment measures that lead to the
liberalization and deregulation of national
investment laws. The purpose of these
measures is to encourage private sector
investment. Compliance with structural
adjustment prescriptions is often a
prerequisite for approval of other IFI
loans. Among the concrete provisions
dictated by IFIs are the scrapping or
removal of restrictions on foreign
ownership and royalties, full access to
resources, reduced tariffs and taxes, and
the relaxation of environmental and social
regulations. In some cases, countries are
forced to extract their natural resources
as part of a structural adjustment package.
In the case of the Heavy Crude Oil Pipeline
in Ecuador and the Camisea Gas Project in
Peru , the IMF demanded that the countries
award oil and gas exploitation concessions
to foreign corporations as a loan condition
(see
page 16
).
“In BHP Billiton's experience, the
World Bank Group has often brought a voice
of reason during difficult periods.”
BHP Billiton submission to the World
Bank Extractive Industries Review in
October 2002, praising the important role
the World Bank has played in facilitating
investment in Algeria, Argentina,
Indonesia, Mozambique and Papua New
Guinea.
flawed development
model
These combined packages of deregulation,
privatization and liberalization have led
to a massive influx of unregulated
activities in the extractive industry
sector in many countries. This has also
severely undermined the ability of
countries to protect their environments,
the rights of workers, and people's
livelihoods.
In general, liberalization measures are
meant to create a favorable investment
climate for transnational corporations. Oil
and mining companies often play a role in
the drafting of such prescriptions for
their host country. In Colombia , the
government hired a private law office,
Martines Cordoba, to prepare the national
mining code. Rules and procedures for
public contracts were completely
disregarded. The law firm was later
discovered to be the legal counsel for
Semex, a Mexican cement company, and the
President's own gas drilling company, Santa
Fe (see case study
page
8
).
While these measures are supposed to
help poor countries attract foreign direct
investment and bring in revenues that will
trickle down to the poor, decades of
experience have shown that this development
model is obsolete. Economists have noted
that countries that are blessed with
abundant natural resources tend to perform
worse economically than countries without
such wealth. This phenomenon, known as the
‘resource curse', has been observed in
comparative studies of growth. An analysis
conducted by economists Jeffrey Sachs and
Andrew Warner in 97 countries found that
countries with a high ratio of natural
resource-based exports to Gross Development
Product tended to grow more slowly than
countries with less resource-intensive
economies
. In addition,
countries become more vulnerable to
external shocks, notably price
fluctuations, as a result of their reliance
on raw commodities.
The World
Bank itself concluded that “countries with
substantial incomes from mining performed
less well than countries with less income
from mining.”
International Financial Institutions
often overemphasize the historical role of
the extractive industries in the
industrialization of the northern countries
in order to promote this as a model for
developing countries. However, countries
like the US , Australia and Canada never
relied on mining in the 19th century to the
extent that many developing nations do
today. Mining in these countries was
accompanied by an industrialization process
that included a transformation in
financial, educational, infrastructural and
political institutions, which is rarely the
case in current mining countries. Moreover,
mining in the northern countries was
accompanied by large and protected internal
markets, whereas the resources extracted
today are generally exported out of the
countries where they are found.
flowing up, not trickling
down
Investments by IFIs in the extractive
industries sector have also not improved
the host country's performance on human
development indicators. Oil and mineral
dependence is strongly associated with
exceptionally dismal conditions for the
poor. For example, mineraldependent
countries generally have higher poverty
rates and higher rates of income
inequality. Oil-dependent societies tend to
have elevated rates of child malnutrition,
lower spending levels for health care,
lower rates of school enrollment and lower
rates of adult literacy.
Whereas IFIs insist that they can help
countries manage the revenues from
extractive industries and ensure the
broader distribution of benefits, a review
by the World Bank's Operations and
Evaluations Department found that the Bank
was only “modestly relevant and
efficacious” in addressing public
expenditure policies in resource-rich
countries
. It noted that the
International Finance Corporation's
measurement of development outcome “does
not take into account the distribution of
benefits.” According to the review, the
impacts have been especially harsh for
women, who .play an important role in
sustaining the family in many communities.
This finding is supported by the
information gathered by the World Bank's
Extractive Industries Review, which noted
in its draft report that “Mining, oil and
gas projects, and Structural Reform
Programs promoted by the World Bank Group
may serve to marginalize women.”
While a key aspect of poverty
alleviation is the creation of employment,
the requirements of privatization and
making operations more efficient have led
to massive job losses and disregard for
worker's rights. In one case, the World
Bank has ordered the total liquidation of
the Colombian state mining sector, allowing
companies that seriously violate workers
rights to continue seizing the country's
resources (see case study
page 8
).
International Financial Institutions and
foreign investors also claim that industry
liberalization will help to stimulate
economic growth by generating upstream and
downstream businesses. This has hardly been
the case. Liberalization and deregulation
of national investment rules, coupled with
the ongoing protection of processing
industries in the North, has discouraged
the establishment of local downstream
businesses in the countries of operation.
Local industry in upstream areas like
exploration, project development,
extraction, processing, transport and
retailing can rarely compete with large
efficient foreign corporations. As a
result, corporations often contract foreign
partners for both upstream and downstream
operations.
private sector: providing
political comfort
For the past ten years, International
Financial Institutions have increased their
support for the private sector through
direct loans and guarantees. IFIs can
invest directly in a project by buying
shares in a joint venture. As a result,
millions of dollars of public money pledged
for poverty alleviation and sustainable
development have been channeled to already
rich multinational corporations. Via this
process, IFIs lend legitimacy and political
backing to controversial oil, mining and
gas operations. Their support is also
essential for mobilizing additional private
sector loans. That is why notorious mining
giant Anglo- American would rather not see
the IFIs withdraw from the extractive
industry sector, fearing that this “may
reduce the number of other players in the
capital markets willing to take the risks
associated with lending to large-scale
extractive projects in developing
countries.”
In theory, this construction also gives
IFIs the leverage to hold the main investor
accountable. In practice, however, this
influence is rarely used on the ground. For
example, the World Bank's International
Finance Corporation insists that its
involvement in Peru 's Yanacocha Gold Mine
ensures the project's adherence to the
highest social and environmental standards.
One only has to take a look at the long
list of complaints from community members
about contamination, as well as the IFC's
refusal to hold the company responsible for
the illnesses resulting from the mine's
June 2000 mercury spill, to see the fallacy
of this accountability (see case study
page 22
). Among the
International Financial Institutions, it is
specifically the bilateral export credit
agencies (ECAs) that provide insurance to
protect companies' exports and investments
against political and economic risks like
devaluation, breaches in agreements,
nationalization and political unrest. In
many cases, the host country is required to
“counterguarantee” the investment, or pay
back the insurance to the ECA if the
project collapses, resulting in a
significant increase in the country's
external debt. In 1996, the debts related
to export credits accounted for 24 percent
of the total indebtedness of these
recipient countries.
The
Australian and Canadian export credit
agencies, together with MIGA, the private
sector insurance arm of the World Bank,
have given guarantees for several risky
mining operations including the Lihir Gold
Mine in Papua New Guinea (see case study
page 30).
the job myth: creating
unemployment
A major argument put forth by
International Financial Institutions for
directly financing fossil fuel and mining
operations is employment creation. However,
current operations in the fossil fuel and
mining sectors are highly capital
intensive. The modern technology
predominantly used by the big
transnationals allows rapid, systematic and
highly mechanized operations. High-tech,
heavy-duty equipment and dangerous chemical
processes like cyanide heap leaching can
now do the work of many hands and require
only a few skilled operators.
In general, most available jobs in the
oil, mining and gas sectors are short term,
lasting only the duration of construction.
Very few workers, and exclusively high
skilled ones, are needed during mining
operations. Workers are often hired as
contractual labor so that they lack job
security and are paid below the minimum
wage. The number of jobs available is too
small to relieve high local unemployment
rates, and cannot possibly make up for the
loss of livelihoods that results from
contamination and resettlement. Although
job creation is a major objective, IFIs do
not monitor the net employment effects of
IFIsupported growth in the extractive
industries sectors, nor the negative
impacts on employment in other sectors.
However, there is clear evidence that there
are plenty of readily available
alternatives to extractive industry
projects that would generate many times
more employment. In the Sepon goldmine in
Laos , only 400 workers have been hired
since operations started in 2002, and
tensions between those hired and those not
are on the rise. Two villages that stood in
the way of the mine have been relocated,
depriving people of their previous
livelihoods (see case study
page 12
).
For the Chad-Cameroon pipeline, project
proponents promised jobs to many local
people. But in the end, locals were stuck
with short-term, low-paying jobs while
highly skilled long-term workers were hired
from the cities or from overseas.
Furthermore, the oil consortium and its
subcontractors paid construction and
pipeline operation workers subminimum
wages, thus breaking Cameroonian labor law.
Benefits for sick employees and work
accident victims have been withheld. To add
insult to injury, workers that complained
about these unfair labor practices have
been dismissed. (see case study
page 26
)
insufficient learning
curve
All though some International Financial
Institutions acknowledge that projects in
the extractive industries sector can be
problematic, they have hardly learned from
past mistakes. They have not mainstreamed
social equity and the environment in their
operations, nor have they enforced the
implementation of existing guidelines. Even
when undertaken, environmental and poverty
assessments have not been effective in
actually influencing project design, and
IFI supervision of projects is often lax or
non-existent.
In the face of increasing criticism, the
World Bank established an Inspection Panel
in 1993 in order to provide people affected
by its operations with a procedure for
demanding accountability. Other IFIs
followed suit by setting up complaints
mechanisms, or are in the process of doing
so. However, all of these mechanisms have
important shortcomings. The World Bank
Inspection Panel is criticized for its
limited scope of investigation and its lack
of power to take corrective action.
Inspection Panel claims have led to
improvements on the project level in only a
handful of cases. In addition, the Panel's
critical findings have had the effect of
frightening Bank management, which has
resulted in their concerted effort to
convert the Bank's social and environmental
policies into weaker standards. This is
highly problematic, as the ripple effect
through other IFIs will facilitate the
widespread approval of even more bad
projects and programs without providing
bona fide opportunities to seek redress.
As noted in a recent review by the IFC's
Ombudsman, “Far too much attention has been
given to specific phrases in safeguard
policies rather than results on the ground”
. In general,
responses by International Financial
Institutions have been insufficient and
marginal and do little to ease the
suffering of the victims of damaging
projects.
literature
9
. For example, world
leaders agreed in September 2000 to work
towards achieving the Millennium
Development Goals, which include
eradicating extreme hunger and poverty,
promoting gender equality and ensuring
environmental sustainability.
10
. Friends of the
Earth International, Phasing out
international financial institutions
financing for fossil fuel and mining
projects: demanding local community
self-determination, January 2002.
11
.Jeffrey Sachs and
Andrew Warner, Natural Resource Abundance
and Economic Growth, 1997.
12
See Heike
Mainhardt-Gibbs , The Role of Structural
Reform Programs towards Sustainable
Development Outcomes, August 2003.
13
Monica Weber-Fahr,
Treasure or trouble? Mining in developing
countries, 2002.
14
Thomas Michael Power,
for Oxfam America, Digging to Development?
A historical look at mining and economic
development, 2002.
15
Michael Ross, for
Oxfam America, Extractive Sectors and the
Poor, 2001.
16
OED, OEG, OEU,
Extractive Industries and Sustainable
Development, Volume I, 2003.
17
World Bank Extractive
Industries Review draft report, August
2003
18
Anglo American
submission to the World Bank Extractive
Industries Review, April 2003.
19
Boote & Ross, as
cited in Michiel van Voorst, Debt creating
aspects of export credits, Eurodad,
1998.
20
Volume II of the 2003
OED review found that only 41% of the
projects reviewed had adequate supervision
and oversight, while compliance with World
Bank policies deteriorated during
implementation.
21
Weaker policies at
the World Bank are likely to lead to weaker
policies in other IFIs, which generally
follow the World Bank’s lead. Complaints
mechanisms are meaningless without a set of
stringent social and environmental policies
to which IFI operations can be held
accountable. See
Demanding Accountability; Civil society
claims and the World Bank inspection panel
by Dana Clark, Jonathan Fox and Kay
Treakle, 2003. For more information on IFI
complaints mechanisms, visit Friends of the
Earth International’s web based toolkit at
www.foei.org/ifi/civil.html.
22
Compliance Advisor
Ombudsman, A review of IFC’s Safeguard
Policies, January 2003. .
