Many NGOs have campaigned for International Financial Institutions (IFIs) like the World Bank to stop funding the extractive industries, arguing that such funding supports activities that are inherently damaging to the environment and/or to the political freedoms in the countries where they take place.

Such a call has taken place despite the tightened environmental, social and political standards that the World Bank group has put in place as conditions to its loans to the sector, and which are meant to ensure that best industrial practices (as set out, for instance, in richer OECD countries) are applied in countries that do not have the appropriate legal and regulatory framework - or which are unable or unwilling to enforce it when it exists. The World Bank rules have become the de facto standards for other IFIs, and have also been adopted by a significant proportion of commercial banks on a voluntary basis through the Equator Principles initiative.

There are two strong arguments towards continued intervention of multilaterals in the oil and gas sector (and other extractive industries). The first is that investment will happen anyway, and IFI participation is a way to ensure that such investment follows minimal social and environmental guidelines. The second is that the exit of IFIs from the sector would weaken the ability of commercial banks to impose the same standards on the projects they participate in, leading to yet more projects taking place under little or no supervision.

And it is actually important that NGOs be willing to acknowledge the positive role of IFIs in such transactions, to encourage the investors to go on the "higher standards" route, and be rewarded for it. In the absence of recognition of efforts to protect the environment and improve the conditions for local populations, companies may simply give up on such efforts, or abandon projects to less scrupulous competitors.

Depending on when investment decisions are made (and what the economic environment looks like at the time), IFI involvement can range from indispensable to irrelevant. In the extractive industries, western investors typically involve IFIs not because they need the funds, but in order to share some of the political risks, and as a way to improve their negotiation position with the local authorities. If working with the World Bank brings no recognition that a real effort is made to comply with higher standards, and there is continued protest against the investment by NGOs, the argument will be made that trying to comply with World Bank standards is a costly and useless hassle.

The case of the two big Sakhalin projects comes to mind. There have been significantly more visible public protests against Shell (which leads the Sakhalin-2 project) than against Exxon (leading on Sakhalin-1) despite the fact that Shell has embarked on a comprehensive effort to follow higher social and environmental standards - it could be argued that Shell was on the receiving end of such protests precisely because it agreed to be subject to outside scrutiny, and that it turned out to be a waste of time and money for them, compared to the route chosen by Exxon, given that most banks (and all IFIs) have been scared away from financing the project by sustained NGO campaigns.

With the increased presence in the oil and commodity world of investors from China and other emerging countries that do not see environmental or social standards as a priority, there is a real risk that IFIs leaving the sector will simply lead to projects being carried out under increasingly worse standards.

Steve Kretzmann

Research by many academics has confirmed that oil export dependent states tend to suffer from unusually high rates of corruption, poverty, authoritarian government, government ineffectiveness, military spending, and civil war. This is called the "resource curse".

At the World Bank Annual Meetings in Prague in 2000, President James Wolfensohn responded to rising NGO concerns about public finance for the extractive industries by pledging to evaluate the impact of lending for oil, gas, and mining on poverty alleviation. The Extractive Industries Review (EIR) was born.

The stated mission of the World Bank Group (WBG) is a "world without poverty". And yet, over the course of two years of global consultations and examination, the WBG's EIR was unable to provide an example of a single instance where an oil project alleviated poverty. Many examples were provided of oil projects that exacerbated poverty. Academic studies were submitted to the EIR that establish a clear correlation between a country's reliance on oil exports and its levels of poverty, child mortality, child malnutrition, civil war, corruption, and totalitarianism.  

Although the EIR made important recommendations in the areas of governance, revenue management, and human rights that should be considered as preconditions to lending for the extractive industries, it recommended a phase-out for oil and coal lending both because consumption of oil and coal will inevitably be significantly reduced due to climate change, and because the track record was so abysmal.

The question the EIR forces us to ask is this: Given that we already know that oil projects are not pro-poor development, that they tend to exacerbate a host of other social and environmental problems, and that they will have to be significantly reduced anyway sometime soon (climate) - at what point does one decide that this is a poor use of public money? Why are we spending billions of taxpayer dollars to fix a system with so many problems? Why not redirect that finance to spur the clean energy transition that we all know is coming?

For those areas with minimal commercial and political risk, corporations do not necessarily desire or need public support from the WBG. These are, after all, some of the most mature and profitable industries on the planet. Where WBG support is sought, it is in those areas where governance is poor, and human rights abuses or other forms of political risk are a very real possibility. In other words, the phase-out means phasing out public financial support for corrupt governments and human rights abusers.  

Oil and coal companies have both the desire and the means to invest in developing countries with good governance structures in place; where they need and want the backing of the World Bank is in areas where governance is weakest. Arguably, if one made improving these governance structures a precondition of lending, some good might be done. But the Bank and other IFIs won't make it a precondition, and that ignores the climate anyway.

Since the EIR, far from phasing out, WBG lending is actually going in dramatically the wrong direction. Coal lending last year was up an incredible 256 percent. Fossil fuel lending overall was up 94 percent. Clean energy lending is also up, but only marginally, thus increasing an already huge gap in relative absolute levels of finance.

Phasing out the fraction of funding for the fossil fuel industry that public money provides would indeed have very little impact on the global markets - at first. It would, however, be a critical market signal that renewables are indeed ready, and that public money from the world's largest development institutions will no longer be used to subsidise the fossil fuel industries, but instead to benefit the poor, to advance clean, emerging technologies and to combat what Sir Nicholas Stern has called "the greatest market failure" - climate change.

Jérôme Guillet

Steve raises two points: one, that lending to the fossil fuels sector does very little to alleviate poverty, which is the World Bank's core mission; and two, that lending to that sector, which has already plenty of access to capital, encourages the wrong kind of investments and is detrimental to the funding of more needed alternative energies.

The first point is entirely correct, but does not negate the fact that oil projects will be less detrimental to local populations if done with World Bank involvement. As Steve notes, money will always be found for fossil fuel projects, given the frequently high profitability of extracting resources from the ground. That such investments follow minimum environmental or social standards or not will depend to a large extent on whether someone was able to shame investors into doing so, and that someone can only be institutions with political clout, such as the IFIs, and in particular the World Bank. Commercial banks will follow World Bank standards, but will be hard pressed to impose them in the absence of multilateral institutions leading the way, and setting "neutral" standards that all market players can refer to.

The second point is debatable, in two different ways. First, is World Bank lending to the oil and gas sector making this activity develop more than it would otherwise? Evidence suggests not, as oil companies are cash rich and desperate for investment opportunities: the blocking factor is not money, but access to reserves, and the World Bank is not helping to pry open markets that would otherwise be closed (think of Venezuela or Saudi Arabia). Second, are the low levels of lending to alternative energies caused by lending to oil andgas? I think not.

I have argued previously (see Bankwatch Mail 38) that IFIs can and should do more for alternative energies - and indeed are in a position to do so. But this is unrelated to what they are doing in the oil and gas sector. The core problem is that IFIs simply do not know or understand the renewable energy sector well enough, and have no deep relationship with the companies involved in that sector, which for the most part are not active in emerging economies.

In fact, in this sector, rather than lending, what would be required would be advice to help local governments create the right kind of framework (and in particular provide the long term stability that is indispensable for renewable energy projects to pay off the heavy initial investments required)  and then a friendly presence on the deal to ensure that local politicians do not renege on the promises made to investors.

While this is an urgent task for IFIs, it is almost completely unrelated to what they do in the extractive industries sector. It could be argued that oil and gas projects are a good training for renewables, with their focus on regulatory issues and long term political risk, so it might be even better for IFIs not to get rid of what little competence they have on the topic, and rather re-allocate (or hire) people, more than funds.

Steve Kretzmann

Jérôme asserts that it's a "fact that oil projects will be less detrimental to local populations if done with World Bank involvement". This is not a fact, it is merely the thin justification that IFIs, export credit agencies and, for that matter, most western corporations operating in areas of poverty and conflict offer up to legitimise business as usual. The record of IFI involvement negates this argument completely.

Take the case of the Chad-Cameroon oil project, which was in fact touted as the model for all IFI involvement in the oil sector, until it failed miserably. The local population is, by all measures, worse off than they were before the project - even the World Bank finally gave up. But the sad fact is that initial support from the World Bank and the European Investment Bank was critical to reassure private investors - Exxon included - who hoped that the Bank's involvement would ensure a successful project. Only oil company balance sheets and Chad's dictatorship view this project as a success.

This is exactly the kind of disastrous project where private investors are most clear that they want the Bank - in order to increase leverage on a corrupt government. It is also the most likely type of project to fail, and the Bank has been unable to stop that. Would the Chadian dictator have imported even more arms with oil money if the Bank wasn't around? Did the Bank's involvement ensure that marginally fewer children died, and marginally less pollution was released? Is this the best that our public money can do - making bad things slightly less bad?

Wow, that's inspirational.

Perhaps the Bank's mission should be changed to: "Our dream, a world with slightly less poverty than might otherwise have occurred even if the absolute level is increasing, for which we are sorry".

The question of what to do with public money is actually critical, and Jérôme seems to have forgotten that there is not an infinite supply of the stuff - less and less every day, in fact. We agree that IFIs should drastically increase their funding for clean energy, but the question that gets asked is where does that money come from? If the nations of the world are committed to combating climate change and transitioning to clean energy, shouldn't our money be where our mouths are?

Jérôme and I also agree that working with local governments to change their investment frameworks would be a very productive use of resources. The IFIs could start by undoing the changes that were wrought by the World Bank's PEPPs (Petroleum Exploration Promotion Projects) and other forms of petroleum sector legal reform and technical assistance in the 1980s and 90s. These efforts had the consistent objective of acting as a catalyst to mobilise the inflow of foreign direct investment into the developing petroleum sectors of many of the Bank's borrowing members, in order to diversify oil sources away from OPEC for Europe and America. Unfortunately those countries that received this form of structural adjustment have debt ratios that are 19 percent higher than those that didn't.

Perhaps if the investment laws were rewritten with the intent of alleviating poverty, fighting climate change and providing clean energy to the poor instead of maximising western investment and sources of oil, things would be different.

On March 3 this year, US Treasury Secretary Timothy Geithner told the Senate Finance Committee that "We don't believe it makes sense to significantly subsidize the production and use of sources of energy (like oil and gas) that are dramatically going to add to our climate change (problem). We don't think that's good economic policy and we think changing those incentives is good for the country".

More so than AIG or General Motors, the developing world and our shared climate are truly too big to fail. We should not be funding projects that undermine both - and oil and gas projects do exactly that.

Jérôme Guillet

To the question: "Is this the best that our public money can do - making bad things slightly less bad?", the response has to be, maybe depressingly, yes. The oil industry is structurally, inherently hard to manage democratically, as it generates massive cash flows that depend exclusively upon the decisions of a very small number of people who authorise production or not, and who set out the applicable tax rates). In other words, by its very nature, it provides highly concentrated power in a few hands.

Very few countries have managed the irruption of that power source in their domestic politics well. And even in western countries, the macro-economic effects are complex and often damaging (see the "Dutch Disease" or the prickly relationships between oil producing states or provinces and the federal government in the US or Canada). Bringing in external stakeholders like the IFIs is one way to limit the damage from the distortions created by oil revenues. If there is any overall solution to the resource curse, it lies in managing the overall demand side and, in the meantime, trying to reduce the inevitable consequences of oil production. Things are worse when IFIs are not involved.

As to the development of renewable energy, the bottleneck is not so much availability of money but, again, political factors - the regulatory framework in each country - and ideological blinders: the fact that renewables are still seen by "Serious People" as mostly useless, ie as PR tools rather than energy policy tools. Remarkably, renewables are still  seen as too unreliable, too expensive and too small to make a difference, and thus not something that requires their full attention.

This is a political battle that needs to be waged first in the developed world, to ensure that renewable energy (together with energy efficiency and demand reduction) becomes the fundamental tool of energy policy rather than a sideshow. Once this is done, it will become a lot easier to bring the same focus to renewables in the emerging world.

Steve Kretzmann

I think that this has been a tremendously useful discussion and I want to thank Bankwatch for facilitating it and Jérôme for his participation.

I think we agree on two very important points. Clearly, we both recognise the urgent need for - and opportunity of - increased support of renewables via public funding. That should be a "no-brainer" for the public banks. However, it still is not, and Jérôme and I also agree on why its not - what he perceptively calls "ideological blinders".  

So the question then is how to change those old, entrenched, attitudes.  

I think accepting that the best we can do is only slightly less bad does nothing but reinforce the attitudes that also continue to subvert a clean energy transition. And that, therefore, a clear repudiation of that attitude - in the form of a ban on public funding of fossil fuels - is now needed in order to remove the ideological blinders and to reinforce a perspective of "yes we can". In truth, we must.

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