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Catalytic conversion ?

International Water Power & Dam Construction
December 1, 1994

All is not quiet with what many call the West’s front – the World Bank. Half a century old and being rejuvenated, it hopes to catalyse increased private investment for emerging markets. However, pressure groups are not convinced that the bank has learned from the past.

Nothing, of course, is for certain. Uncertainty abounds, especially for major hydropower projects. To investors – multilateral agencies like the World Bank as well as the money markets – exposure to risk is of concern in areas such as environmental protection, resettlement problems, geotechnical difficulties and the institutional reforms which
are liberalising national power sectors.

Naturally, in such a changing climate the players themselves evolve, and the World Bank is no exception. Or is it? Numerous pressure groups contend that, in the wake of the bank’s recent and very public fiftieth birthday, it has not really changed, despite the public claims. The World Bank’s seeming mid-life crisis comes at a time of global liberalisation and changing project finance systems. The changes were partly orchestrated by the bank to establish suitable institutional investment frameworks, as public coffers cannot meet future investment needs.

Some US $100bn per year is needed to meet the national plans of developing countries during the 1990s, 40% in foreign exchange, said John Beasant-Jones, World Bank principal energy economist, at the recent Water Power project finance conference in Frankfurt. About half is needed by China and India.

Beasant-Jones said the foreign exchange element is up to five times the current total finance for power projects available from agency funding, and no more is likely.

‘The World Bank would finance less than 5% of [the] total investment in hydropower in developing countries during the 1990s if it continues to lend at its recent average rate of US $700M annually,’ he said. This can be viewed in perspective against the last three decades, in which the World Bank has been involved in financing 110 hydropower projects
in 50 developing countries, from 6.6MW up to 2460MW in capacity. The total installed generating capacity is about 35,000MW, he said.

‘The estimated need for US$60bn in local currency is also formidable,’ he said. ‘Developing countries cannot afford to finance this amount largely from government financial resources and credit …

Capital-intensive options such as hydropower are at greater risk in this situation.’

The answer has to be huge injections of foreign capital investment to take up the shortfall. ‘The financing prospects for hydropower … depend partly on the attitude of private  investors to the risk associated with these projects,’ he said.

The evidence, he says, shows that the investors favour small, low risk projects, often run-of-river type. However, such projects can only make a contribution – though significant – to the future capacity needs of developing markets. Larger projects are therefore still required, it is ventured.

The cost of social risk

Private investors are, therefore, wary of investing in large hydropower projects. The projects are viewed as high-risk, but not only from the views of hydrological uncertainty, programme slippage and power demand forecasts which are off the mark; many of the project suffer from controversy over social and environmental impacts.

‘Hydropower projects are commonly considered to be the archetypal development that displaces large number of people, usually against their will,’ said Beasant-Jones. Though, citing a bank study, he points to irrigation projects as bigger culprits in the displacement hot potato. However, the common factor is large dams.

He said that resettlement costs differ greatly mainly because rates of compensation vary widely. Current costs of resettlement in bank-financed schemes are up to six times the per capita GNP of some countries.

‘At these rates, resettlement costs would displace some prominent hydropower projects from the least-cost options for expanding power supply.’

That, contend many pressure groups, is the whole point and explains, they say, why in recent decades of publicly-funded big projects the issue has not been resolved. However, the new financial reality looks to be putting paid to that problem, as investors will simply ignore high-risk deals like large hydropower if it does not get its act together.

The situation has to be addressed by the World Bank, and other funding bodies, if the problem is to be overcome – especially as the bank sees much of its future role as being a catalyst – helping to attract private investment money to developing world infrastructure projects.

The World Bank therefore is, actively trying to redefine its mission. With other funding bodies it has also initiated a study on resettlement issues which aims to draw up internationally accepted standards for dealing with the problem. A conference on the subject is scheduled to take place next month in England. Also, the bank recently introduced a new large project guarantee system.

With respect to resettlement, in the face of the World Bank’s policy that previous income-levels and standards of living for displaced people should be restored, this conference move can be interpreted as an admission that this has not been universally happening. In fact,
this is part of the ethos of the anti-large dams movement. The World Bank is not hiding from the fact. Its 1993 report: Involuntary Resettlement in Hydropower Projects,
looked at 14 schemes with which the bank was involved. It concludes, says Beasant-Jones, that resettlement costs tend to be underestimated and that cost overruns average 54%. The estimate excludes the knock-on cost in project delays.

Although the report and study mean the bank may not be hiding from the harsh reality of the resettlement problem, the pressure groups want it to do something about it.

Once the international resettlement standards are agreed, the debate will open properly on how the costs should be paid for. In one corner are those who want to see the cost internalised in project costs, which could stop many projects. In the other corner are those who want to externalise the costs from projects, believing them to be costs to

That’s guaranteed

The World Bank’s founder had envisioned guarantees as its main line of business, but little has happened, ‘for a variety of reasons,’ said Dr Ashoka Mody, principal financial economist of the bank’s project finance group in CFS, at a recent Financial Times conference.

In September the World Bank decided to extend its existing guarantee system to encourage private investors to join large projects in developing countries.

The bank says: ‘Despite the willingness of the investors to bear the commercial risks, the risks of failure of the public sector to fulfill its contractual obligations can be a major constraint in mobilising finance.’

The bank may then accept some non-commercial risks that private-investors are unwilling to bear, through project finance or extended maturity tools, or a mix of the two, he said. Many projects will then become attractive to potential investors, but how the evolving resettlement cost issue is resolved and affects the guarantees is unclear.

Spreading the word

Apart from the Oxford conference and guarantees, what the bank has been doing to reissue itself to the public and markets is to present its ‘five major challenges … crucial to future progress.’ The challenges are: to pursue economic reforms, invest in people, protect the environment, simulate the private sector and, interestingly, ‘reorienting government.’

The realignment information comes from the World Bank’s explanatory document  Learning from the Past, Embracing the Future, a soft-focused explanation of its strategy for the future. Even bank staff admit that it is vague. The bank’s brochure goes on to say it needs to build upon and enhance its financial and advisory roles. This worries the pressure groups as many complain that it does not have a sound past record to build upon.
The brochure goes on to say that more flexibility is required, and that if has six guiding principles to help enhance focus and effectiveness: selectivity, partnership, client orientation, results orientation, cost effectiveness and financial integrity.

Of particular interest is the call for ‘more accountability for performance’ under the-guiding principle of results orientation. It expands on this point to say that if has ‘recently expanded its policy on information disclosure to make available more information at all key
stages of the project cycle…’

While acknowledging that some project technical information was not available for public scrutiny in the past, a World Bank spokesman said that all relevant project documents are now available through the recently established network of Public Information Centres.

Public pressure opened the bank’s doors. But, as before, material which is confidential to a borrower or government will not be made available, just as the proceedings of the bank’s board of directors is confidential.

There have been good noises from many quarters about this new glasnost mentality – the spokesman said that the Asian Development Bank is thinking along similar lines.


The new openess does not ring bells with some dams campaigners, though. Patricia Adams of Probe International says that she is ‘not impressed’ by the bank’s recent ‘apparent reforms. ‘We’ve monitored it for the last 15 years. The bank is continually recreating itself – resetting the clock – by, for example, rewriting [its] policies. In the past this has successfully disarmed critics, but the critics have been around long enough to see through such moves.’

A good example of the lack of real policy change, she says, is funding continuing for the same kinds of projects as before, like the proposed Arun 111 project.

However, as a further proof of its moves to greater-accountability, the bank spokesman cited the recently established independent-though bank appointed-Inspection Panel. In early November the panel, in fact, registered its first request for inspection – from a Nepalese group over Arun III.

The complaint concerns alleged violations by the bank of its provisions for various operational policies and procedures. Before the end of this month the bank’s management will recommend whether or not to investigate the claim, then the board of directors decide if that is okay.

Claim assessment appears to be a long procedure, but it is the first ‘safety net’ to catch any shortfalls in implementing its goals in projects it is supporting. For the dams community, this complaint will probably become a veritable test case on the new-style World Bank, and
the relevant documents are to be made public, probably by January.

As a further consultative move, an NGO-World Bank Committee has been running since the late 1980s. The bank spokesman says that the non-governmental organisations (NGOs) have had ‘a tremendous influence,’ and in the year to June had inputs to more than 100 Bank-supported projects of all kinds.

However, despite these moves, the pressure groups are so far sceptical that anything in the bank’s methodology has really and effectively changed. As such, in October they brought out the Manibeli Declaration – a birthday present to the bank at its meeting in Madrid.

The declaration calls for a moratorium of all World Bank funding of large dam projects, including those in the pipeline, until a number of conditions arc met. It has been produced by the International Rivers Network with more than 2150 NGOs. Better treatment of displaced people and the environment affected by large dam projects are the basic
thrusts of the 17 point declaration. This would involve local consultations, and that would signify the bank had changed, say some pressure groups.

So far the World Bank has not officially responded to the declaration, says Patrick McCully, IRN’s campaigns-director. The bank spokesman says that ‘a reply was being signed off as Water Power went to press, but was unable to offer an insight as to its contents.
While the IRN waits, it has been preparing what it says is a comprehensive dams listing report, with 50 pages of tables and appendices, as it says no thorough collated list is available from the bank for review.

Pro-people, not anti-dam

The developing world appears to believe that the pressure groups are anti-large dams per se, but this is not the case. What is clear in that both sides have different – and strongly held -priorities.

As the IRN said in a letter to US vice president Al Gore, in September, referring to a particularly controversial case: ‘Flood management and increased energy supplies are worthy objectives for development of the Yangtze Basin.’

The letter goes on to state opposition to the Three Gorges Project, it being ‘neither appropriate nor the only means to achieve these objectives.’

With resettlement standardisation moves happening in a climate where the World Bank looks set to become – relatively – a catalytic bit player, it is reasonable to assume that resettlement planning and payments, and efforts at environmental mitigation, must get better.

What is certain is that the bank’s rejuvenation has not been part of pro-active process to tackle resettlement and environmental issues. It has had to be pushed and pressurised to take action.

Aside from the growing wave of domestic savings pools which help tackle the problem of local currency costs, especially in Latin America through pension funds, there is one further variable to the changing project finance equation: ethical investment funds.

Though only a small part of the investment picture at present, the ethical funds are anticipated by investment advisors to grow virtually exponentially in the next five years, to become a significant market force.

The public – through environmental and social concerns, and pressure groups – pulled the resettlement issue onto the discussion table. Where that public will want its money invested among the cash-hungry liberalised markets is a coming force to be reckoned with.


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