Friends of the Earth's Response to MIGA's criticism of "Risky Business"

April 3, 2002

Moina Varkie
Marketing Manager
Multilateral Investment Guarantee Agency
1818 H St. NW
Washington, DC 20433

Dear Ms. Varkie:

We are writing to reply in a more detailed fashion to MIGA's response to the Friends of the Earth/Reform the World Bank Campaign/Urgewald report, "Risky Business: How the World Bank's Insurance Arm Fails the Poor and Harms the Environment."

In your response, you have criticized the methodology of Risky Business, and our analysis and conclusions regarding MIGA's development impacts, its environmental and disclosure policies, the effectiveness of its project monitoring, and the value of its investments in certain sectors. This letter will address each of these criticisms in turn.

Methodology

Your criticism that we failed to talk with MIGA staff is inaccurate. The consultant who compiled the information for this report, Mia MacDonald, had numerous phone conversations with Gerald West, and had many off-the-record conversations with other World Bank Group staff. The report cites these conversations throughout. In addition, our organizations and others have previously engaged MIGA on issues such as the revision of its environmental and information disclosure policies.

What you claim are "many factual errors"¹ are in fact differing interpretations on the part of MIGA and our and other organizations as to what constitutes acceptable corporate behavior and what constitutes sustainable development, particularly for projects that are funded by a public, taxpayer-supported institution such as MIGA. We also find it unfortunate that your response avoids addressing crucial issues raised in our report and instead deliberately mischaracterizes our comments and assertions. For example, we did not criticize MIGA for failing to provide a guarantee for a proposed mining project in Suriname, as you suggested. Instead, we criticized MIGA for exploring a project with design features similar to the disastrous Omai gold mine, including the same tailings dam design (a dam that broke and spilled billions of liters of cyanide into a local river), the same contractor, and which would forcibly relocate the same tribal community. This is portrayed quite clearly in the report.

Poor Development Impact of MIGA Investments

MIGA seems stuck in an outdated and overly constrained understanding of development. MIGA has succinctly summed up its vision as "Investment equals growth equals poverty reduction."² While growth is important to raise incomes, it is clearly insufficient. As the World Bank's former chief economist stated, "Development is concerned not only with increasing GDP, but also with raising living standards more broadly. It is concerned with democratic, equitable, and sustainable development. Development is seen as a transformation of society: a dual economy is not a developed economy, and many of the [Bank's] earlier strategies did little to promote this broader transformation of society."³ While other parts of the World Bank are beginning to recognize the multidimensional nature of poverty and to define "pro-poor growth", MIGA has not updated its thinking.

Furthermore, MIGA does not even seem sure it has a role to play in poverty alleviation. A 1998 MIGA report on the development effectiveness of projects it has insured suggests that MIGA can do little to affect poverty:

MIGA, dealing solely with private sector investors as its vehicle rarely has an opportunity to directly reduce poverty. Such investors, in search of customers of their own goods and services, do not often locate their investments in the most needy countries or serve the needs of the poorest of the poor. ⁴

MIGA's development effectiveness is also limited by where it invests. In another mischaracterization of our critique, you suggest that we claim that MIGA's portfolio is becoming more concentrated and is identical to private investment. Instead, our report points out that the top recipients of MIGA's investments are middle-income countries that already receive the greatest amount of private foreign direct investment (FDI). We are aware that MIGA's percentage of investments in IDA countries is higher than private FDI, but it still falls below where a development institution should target its resources. MIGA guaranteed projects worth $396 million in IDA countries in FY01, out of guarantees totaling $2 billion for the fiscal year. This 20 percent ratio is actually less than MIGA's total gross outstanding portfolio for IDA countries; this cannot be regarded as an impressive trend or a concrete demonstration of MIGA's commitment to the poorest countries. It is also important to note that even were MIGA to shift more resources to IDA, this alone would not address the variety of other development effectiveness issues raised in our report and in this letter.

You claim that MIGA screens out projects that will not be beneficial to the host country. As an example, you cite MIGA's refusal to support casinos. Yet in 1998, MIGA issued $7.2 million in guarantees to Marriott International and $27 million to the Bank of Nova Scotia for the construction and operation of a 300-room hotel in the Miraflores business district of Lima, Peru. MIGA's public project summary does not say that the hotel includes a 24-hour casino. In fact, now operational, the enterprise's official name is Lima Marriott Hotel and Stellaris' Casino. MIGA's guarantee for the hotel goes up to the line and maybe beyond World Bank Group bans on support for most gambling activities.

Moreover, it is difficult to see what "significant development impact" the Marriott Hotel and Stellaris' Casino has had in Peru. Certainly, Lima suffers no shortage of casinos; a search on www.casinocity.com turned up no fewer than 14 in operation. Similarly, high quality hotels, which are often justified as promoting foreign investment, are plentiful in Lima.

You also state that MIGA only guarantees projects that are sponsored by corporations that are committed to responsible corporate citizenship. Yet as far as we are aware, MIGA does not actually screen projects on the basis of the past social, environmental, labor, and human rights records of the project's sponsor. It is therefore entirely unclear how MIGA actually assesses the past performance of its potential clients. We would appreciate further information in this regard.

Poor Environmental and Disclosure Policies

MIGA's environmental and information disclosure policies are the worst in the World Bank Group. It is precisely your justification of MIGA's inferior policies as being "appropriate for the agency" that calls into question why MIGA is part of the World Bank Group.

MIGA's disclosure policy contains broad exceptions that disclosure of information to the public will not harm "business and competitive interests of MIGA's applications" and will not violate "confidentiality obligations." In practice this results in inadequate information disclosure to the public, and hampers the public's ability to monitor projects. You state that MIGA's clients are expected to comply with all the environmental covenants contained in their contracts of guarantee, yet because these contracts are not public, project affected communities cannot tell if the projects are in compliance with these covenants.

While MIGA releases quarterly newsletters and an annual report, there is no provision for MIGA to respond to information requests about projects in between the newsletters or to make information available on the majority of projects under consideration. The annual report and financial statements provide virtually no information on how MIGA decides which projects to guarantee, how it assesses country risks, and how it monitors and evaluates guaranteed projects. Documentation prepared for the Board, including project proposals, is confidential. A list of available EIAs for Category A projects is on MIGA's web site, but the EIAs themselves are not posted. For Category B and C projects, no pre-approval information is disclosed to the public. These standards are clearly unsatisfactory for a publicly-finance development institution.

Actually obtaining the EIAs for Category A projects can be a problem, particularly for those not based in Washington. In a visit to the World Bank Info Shop, our consultant found only two of the five EIAs on hand. One EIA, for a project in the Dominican Republic - a Spanish-speaking country -- appeared to be available only in English.

MIGA also lacks a formal procedure for notifying the public that an EIA for a Category A project is available (one has to check MIGA's Web site, where the list of EIAs is not readily apparent) or for responding to public comments on such projects. Two other public providers of political risk insurance have systems to solicit comments on Category A projects being considered and to make project EIAs more readily accessible. OPIC, for example, will automatically notify members of the public when applications for projects requiring EIAs are submitted. It lists available EIAs on its web site and the EIAs can be obtained from OPIC's Environment Unit; the comment period is 60 days. The Australian ECA, EFIC, includes a link on its web site to an online version of the EIA. This belies your claim that MIGA's standards are equal to or superior to other insurers.

MIGA's standards in other areas are also clearly inferior to the other World Bank arms. MIGA's policy on EIAs falls short of IDA, IBRD and the IFC. IDA/IBRD, for example, releases EIAs for Category A projects 120 days before a project decision. They and the IFC also release information for Category B projects. While IFC requires a minimum of two consultations with affected communities, and that the EIA reflect the concerns of and discussions with the community, MIGA's consultation requirements are vague. The Bulyanhulu EIA, for example, suggests that "public consultation" was confined to government agencies and state bureaucrats. IFC on the other hand has prepared a Good Practice Manual on Public Consultation. MIGA could reference it in its policy statements and provide to all potential clients.

While MIGA requires that its projects comply with IFC's environmental and social safeguard policies, in cases where specific host country laws or World Bank environmental guidelines are absent, MIGA may "apply other internationally recognized standards or best management practices to the project", although these are not defined or referenced. Variances from these standards may also be granted for particular projects. By allowing its stated policies to be deviated from in certain cases, MIGA is making it difficult for stakeholders to determine when or if a guaranteed project does not comply fully with MIGA/IFC and IDA/IBRD standards. OPIC, on the other hand, requires that all projects it guarantees or provides loans to comply fully with the World Bank's Pollution Prevention and Abatement Handbook.

Inadequate Monitoring

Staff and methodology limitations affect MIGA's capacity to monitor ongoing projects and evaluate their impacts. MIGA's small evaluation team (at last check three- the Director of the Evaluations Department, a full-time staff person and a full-time consultant) precludes effective monitoring and in the experience of our partners, overall monitoring of MIGA projects once guarantees are issued is weak. MIGA's evaluation methodology - visiting project sites from time to time, generally while traveling for other business, and periodic project sample reviews -- was designed to "optimize the use of staff time and minimize costs" and "ensure that, as far as possible, the project evaluation process was not too burdensome to the Agency's clients." [emphasis added]⁵

In the case of Antamina, you suggest that MIGA went to great lengths to monitor the social impacts of the project. However, the Compliance Advisor/Ombudsperson found that "there is no appropriate social specialist in the review teams to monitor or provide a second opinion in this now very sensitive and politically risky area."⁶

Sector Investments

In the mining sector, you state that mining projects bring substantial development benefits, ostensibly because they employ people and earn revenue. However, the development impacts of mining projects are increasingly being questioned. For example, a recent report commissioned by Oxfam America, Extractive Sectors and the Poor, found that among countries with similar incomes, the more a country relies on exporting minerals, the lower its Human Development Index rank. The report also found a positive correlation between mineral dependence and the percentage of the population living in poverty. These statistics suggest that reliance on the mining sector can have profound negative social effects above and beyond the local environmental or social problems of the sorts described in the report.

With regard to the financial sector, you assert that MIGA's support of the financial sector contributes to development in poor countries. We share your view that effective financial systems are essential for growth and poverty alleviation. It is not clear, however, how MIGA's guarantees to large international banks lead to increased access to credit for small farmers or the opening of bank branches in rural areas for example. A recent study of liberalization of the finance sector in eight countries found increased investment, longer bank opening hours, establishment of Automatic Teller Machines (ATMs), and expanded use of debit and credit cards. But, these benefits were confined to urban areas and primarily benefit those already relatively well off.⁷ Simply supporting multinational banking services in developing countries cannot be said to deliver direct poverty alleviation benefits.

In the area of infrastructure, we acknowledge that projects can generate additional economic benefits to host countries due to the purchase from local enterprises of equipment, supplies and repair and maintenance services. However, in some cases, according to MIGA itself, investors have imported most of the raw materials for infrastructure projects from their home countries - a reverse capital flow that further enriches developed country corporations.⁸

Resistance to Reform

In closing, we find the tone of your response disappointing and unproductive. For example, rather than aspiring to uncover the situation at the Julietta mine in Russia, you disparage the "source on the ground", people who risk their lives going public with information that exposes the government and its allies. You also never addressed the fact that MIGA guaranteed this project after the Russian State Committee on Environmental Protection was dissolved. Furthermore, MIGA seems to be content that no disaster has yet happened, rather than attempt to find out whether the project design has the potential to lead to a major disaster and to avert this possibility. Mischaracterizing the nature of our critiques only shows that MIGA has little interest in recognizing its weaknesses as a development institution.

We have found MIGA to be unduly resistant to reform and find MIGA's progress in reform efforts to be wholly inadequate. This has led many organizations to conclude that MIGA has little interest in conforming its policies and practices with the World Bank's mission of poverty alleviation, and has led many to conclude that MIGA should therefore no longer function as part of the World Bank Group. We appreciate the opportunity to have this exchange with you and look forward to clarification of outstanding issues.

Sincerely,

Carol Welch, Friends of the Earth
Heffa Schucking, Urgewald
Antonio Tricarico, Reform the World Bank Campaign

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1 In fact, the only specific error mentioned is that we transposed 1999 and 2000 data. However, that error does not affect the substantive point that the top five recipients of MIGA investments are five non-IDA countries that already attract the majority of private FDI.
2 November 20, 2000 MIGA press release describing a "mobile office" initiative.
3 Joseph Stiglitz, "The World Bank at the Millennium", 1999.
4 West, Gerald T. and Tarazona, Ethel, MIGA and Foreign Direct Investment: Evaluating Developmental Impacts, The World Bank/MIGA, 1998.
5 West, Gerald T., and Tarazona, Ethel, MIGA and Foreign Direct Investment: Evaluating Developmental Impacts. The World Bank/MIGA, 1998.
6 "Preliminary Audit Review of MIGA in Relation to Compania Minera Antamina S.A.", Office of the CAO, February 2001.
7 Cobham, Alex, "Go with the Flows?: Capital Account Liberalisation and Poverty", London and Oxford: Bretton Woods Project and Oxfam, 2001.
8 MIGA Development Effectiveness Report: FY00, August 16, 2000.