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lps84433.pdf | 11 | Mr. LOWERY. | I think that the World Bank has looked through— I mean, they just came out with a paper in February, but I think that some of the lessons they have been learning, the way they have explained it to me at least is, in the past when they were looking at corruption issues and infrastructure, they were looking at them from the big, overall, macro perspective, and sometimes from a project level. But they have said that what they have to look at more is how do you look at it in a sector, a particular sector, whether it's energy or transportation or telecommunication? So they are actually trying—that's one of the things that they right now are saying admittedly that they have to work on. So we are looking forward to seeing more from them there. They are also trying to figure out how to work much more up front the environmental and social issues into the project design of the program. And one of the problems that sometimes happens is, the project design has happened and it has happened from a much more technical perspective, and because of that we get to a situation later down the road where nobody had thought through the environmental issues, or they had thought through them but kind of after the fact. And I think that the World Bank is trying to move that much more up front, and they're doing it through their own management structural changes without trying to harm, I think, like overall compliance, as to whether or not they're following their policies and things like that. So I think that those are a couple of things that they have told us that they're working on, but the proof will be in the pudding, as usual. |
lps84433.pdf | 12 | The CHAIRMAN. | Looking ahead to the work of our second panel, what does the administration expect the IDB to do once the results have been received from the social and environmental audit of the first phase of the Camisea project? How can the IDB ensure that the audits lead to lessons implemented and not simply lessons observed? |
lps84433.pdf | 13 | Mr. LOWERY. | Well, I think that there have been some lessons learned that need to be thought about very carefully on the Camisea project. When we looked at Camisea back in 2002–03, we were very concerned—we, the administration, were very concerned that the IDB was coming into this very late in the game. And the problem with that is—there is probably a threefold problem. First, the IDB's role is to catalyze private sector investment. It is not to fill a financing gap because the private sector investors ran out of money. So we're concerned about that. Second, because it was late in the game, they were not as involved in some of the project design work, and so they didn't have some of the environmental and social safeguards that probably they would have had in some of the other IDB projects. And third is that it's important to work on building capacity within the countries, in their municipalities and their communities, and I think that the IDB does a pretty good job on that but they've got to get started early because that's a very difficult issue to tackle. So we think that those are some lessons learned. I mean, in fact it's the reasons why we were the only country that actually did not support the Camisea project back in 2003, and we were alone, and obviously there have been some problems since then. But I think that in terms of going forward, first of all, we know that Camisea is a very important project to Peru. It's helping the country reduce energy costs, providing jobs, and it could be very important for Peru's economy. We think that the IDB, working with the Peruvian Government and the communities, needs to work to solve the problems that have been cropping up with Camisea I, and then with Camisea II they need to take into account the lessons that they have learned. And I think they're trying to do that by basically working right now with the Peruvians, which is much earlier in the process than was the case in Camisea I. As to how the United States will vote or look at that, we haven't actually made a decision. I mean, what we have to weigh is a variety of factors. We have to weigh the development benefits that could accrue to Peru and the Peruvian citizenry. We have to look opment Bank. We have to look at the environmental and social safeguards, as well as the fiduciary controls and some of the revenue management issues you had mentioned earlier. And we'll weigh those factors, as we did back in 2003, and then we'll figure out what to do. I know that the IDB is looking very carefully. President Moreno has been deeply involved. I think he was just in Peru, talking to them about this issue. And I know that President Toledo and President Garcia have talked about setting up some sort of oversight committee on this, so the Peruvian Government is also aware that this has been a problem and they've got to fix it. |
lps84433.pdf | 14 | The CHAIRMAN. | I thank you for that response. Let me just say that I will add into the record of the hearing a letter that I received from the Ambassador of Peru to the United States, in which he strongly endorses the results of what has been occurring, complete with an annex of benefits of the project, so that that will be a part of the record and his testimony in that form. [This information appears in the Additional Materials Submitted for the Record section.] Let me ask, does the experience of the Inter-American Development Bank with the Camisea project show that the organization has the capacity to monitor compliance with its own policies? And what is the United States recommending regarding this question, with regard to the pending reorganization of the IDB proposed by what concern does the administration have regarding IDB's intent to increase private sector and infrastructure financing? |
lps84433.pdf | 15 | Mr. LOWERY. | I think that the IDB does have fairly significant resources in terms of environmental and social compliance issues. I think that where they probably made some mistakes in Camisea, I was underestimating how much it would actually take because of how big this project really was, and how big a role they were having to play with the Peruvian Government and with the communities. I would think that the IDB has learned some lessons from that, and will work with them on those issues, both resource and policy issues. The role of the private sector is actually vital. I mean, in the end, what we want to see happen is these MDBs put themselves out of business, and the only way you're going to do that is to basically create the right types of environment to actually get private sector flows and investment capital coming. And I think that that was the hope in the 1990s, and you saw a dip in how much was going toward infrastructure from the MDBs, and a lot of that—I mean, there were a variety of reasons for that, but one of the reasons I think was they thought that private sector capital was going to start flowing better, and basically that didn't happen, and so they had to ramp up their ability to put in more. But I think it's very important that the IDB work with the private sector and do a better job. I mean, this is probably our number one priority at the IDB. We have talked very extensively with wants to see the IDB moving more toward how do you influence the environment so that the private sector can play a much more extensive role, whether it's in infrastructure projects or small and medium enterprise development. |
lps84433.pdf | 16 | The CHAIRMAN. | On the second item, why did the World Bank suspend new loans and grants to Chad in January 2006? Why did it resume lending to Chad in April 2006? What criteria does the World Bank use to decide when to cease funding to a country, and what action, if any, is our administration pushing the World Bank to take with regard to the revenues generated from the Chad-Cameroon pipeline? |
lps84433.pdf | 17 | Mr. LOWERY. | The Government of Chad and the World Bank were having an argument back in 2005. The Government of Chad believed that it needed to use more of the resources that were coming from the revenues for the here and now, as opposed to for the future. There was a portion of the revenues, 10 percent, that was going to something called the Fund for the Future, basically a rainy day fund, when the oil runs out. And I think that what the Chadian Government was saying is, ''Look, we're really poor and we need the money now.'' That's kind of the good way of looking at it. There might have been problematic ways of looking at it as well. I think the World Bank was saying, ''Well, we had a deal and we need to kind of work on that deal.'' And I think frankly communications broke down between the two. And then in December—I believe it was December, maybe it was November—the Chadian Government, the parliament basically said, ''We're just going to overturn this deal.'' And so at that point in time the World Bank was basically stuck with a gun to its head, in a metaphorical sense, and basically you can't negotiate that way. So they basically said, ''Fine, we're going to stop the funds at the escrow account. We're going to cut off new lending, and we're going to stop disbursements on our pipeline.'' Since that time, Chad and the World Bank have conducted a series of negotiations, both here—well, actually here, in Chad, and in France—to try to work out these agreements. And in April they created an interim agreement in which there would be traunched money coming out of the escrow account, but the percentages would change around a bit, but there would still be oversight of the college. We have basically been supportive of where the World Bank has been, but we've obviously listened very carefully to what Chad has been saying, because we wanted to get their perspective on this thing. They are trying to work out a more permanent solution in which, my guess is, there will be some renegotiation of how these funds will flow. And also the World Bank is trying to look at what has become a different issue which actually wasn't foreseen back in 1999–2000, which was the tax revenues that would actually come in from this account, because at the time oil was $15 a barrel. It's now $75 a barrel. There's a lot more coming in, and I think that the World Bank is trying to figure out what to do with that, because that's obviously going to go into the Chadian Government's coffers. And the idea is again, budget transparency, capacity so that we and the people of Chad actually have an understanding of what's going on with this money. So that's kind of how we've been looking at it. We've tried to help, in basically working with the World Bank and working with Chad, and we've tried to help in a different way, which is providing technical assistance to this civil society group, that college that oversees kind of some of the funding. |
lps84433.pdf | 18 | The CHAIRMAN. | On that issue of the civil society groups, their claim is that several years ago they warned about problems with World Bank plans for the pipeline, and they claim that their warnings were ignored. In the workings of the World Bank, or, for that matter, the other development banks, to what extent is attention paid to civil society groups as opposed to governmental officials? |
lps84433.pdf | 19 | Mr. LOWERY. | Well, I think that the World Bank obviously is more used to working with governments. I mean, that's what they do, so they will pay a lot more—they pay attention to governments, but they clearly do listen to civil society groups and to communities as to what is going to be effective. And I think if we look back at Chad-Cameroon, the World Bank's role from a financial perspective is tiny. It's not much of the overall financial structure. But their role in terms of setting up some of these groups, about where the money is going, the environmental safeguards, the World Bank played a crucial role in that, and that included working with civil society. I'm sure that there are some civil society groups that are disappointed in what happened, but the reason we know about what's going on with some of the money in Chad is not because of the United States people. It's not because of people in Europe. It's because of people in Chad, and that's because of civil society groups that are working in this college. I mean, the World Bank deserves some credit for helping set that type of system up. |
lps84433.pdf | 20 | The CHAIRMAN. | We thank you. |
lps84433.pdf | 21 | Senator MARTINEZ. | Mr. Chairman, thank you very much. I know that you've covered extensively the Camisea project, which was one that interested me. And I won't go over that again except to ask the role, Mr. Lowery, that the—back on the issue of NGOs or civil society, as you were just discussing—have they in this particular instance been involved? What role have they played? And have they been a force in advancing the project and in allowing it to go forward? I also know there have been environmental concerns, and perhaps you can touch on that as well, and the role that the NGOs and the environmental groups have played in that particular project. |
lps84433.pdf | 22 | Mr. LOWERY. | The NGOs—some of the NGOs were extremely concerned about this project back in the 2002–03 time frame. They were very worried that the project sponsors and the Government of Peru was not paying enough attention to environmental controls and erosion control, and to the actual fractionization plant that was put into something that was very close to a Ramsar site, which is something that the international NGOs care deeply about. And at the same time they also wanted to be involved in how, if you're going to do this and you're going to affect these communities, what is going to happen with the flows, and what is going to happen to these communities and how do they have a chance to argue their point of view? The IDB came in and, again, the United States did not support this program in the IDB because of some of these concerns, actually. But the IDB did try to play a better role in getting an ombudsman involved and trying to help some of the indigenous people about how they work with the country and work with the project sponsors. They have actually helped set up a—some of the funds go toward the local groups. And I think that what the IDB is still trying to do is work with these NGOs on how you set up a better way of compensating some of the people that have been affected by this project, and particularly in terms of some of these spills that have happened. So the NGOs have been actually very involved, and I think the IDB has worked closely with them. I think some of the project sponsors have, as well. Obviously it's not a monolithic creature. I mean, some NGOs have different views than others. But we are of the view that Camisea has not been a success. I mean, we are of the view that it could have been better designed, it could have been—working with the NGOs could have been probably better handled, and the civil society groups. But at the same time it is an important project for Peru, and we're hopeful that given some of the lessons learned, that can be improved upon in the future. |
lps84433.pdf | 23 | Senator MARTINEZ. | Anything else on that? Just the issue in general—and again I apologize if it has been covered—but the issue of corruption and the issue of transparency, would you touch on that in terms of the importance of avoiding those pitfalls and what you're doing in order to prevent the resources not going to the intended purposes, as I know so often in the history of our efforts, unfortunately the amount put in gets diminished by the amount that unfortunately doesn't end up in the right places. |
lps84433.pdf | 24 | Mr. LOWERY. | I think that in terms of corruption, I mean, that is one of the key issues that we need to worry about, not just infrastructure projects, but all projects and all programs. Some of the times it's in budget support. We think that it's best handled in a variety of ways, first at probably the institutional level, which is we want the multilateral development banks to police themselves. They need to—you know, Paul Wolfowitz has been talking about this very well, and actually some of the other presidents in the MDBs, as the chairman mentioned in his opening statement. But then at the country level, I mean, what we have tried to do is help build up capacity; work with countries that are frankly implementing some better policies, and that's why we talk a lot about what we call performance-based allocation systems; and then working with the countries and working with the project sponsors on the actual project level. How do you set up mechanisms so that you have sound fiduciary measures, good procurement practices that meet best standards, and sometimes setting up mechanisms, depending on the case, on actual oversight of the funds, as was the case in Chad-Cameroon. That doesn't mean that we're going to catch it all, but I think that the thing is to try to squeeze as much of the corruption and the problems out of the system as you possibly can. And I would say it's probably one of the top three or four priorities we have at the Treasury on how to deal with the multilateral development banks. |
lps84433.pdf | 25 | Senator MARTINEZ. | Thank you, Mr. Chairman, and thank you, |
lps84433.pdf | 26 | The CHAIRMAN. | Thank you very much, Senator Martinez. And I join the Senator in thanking you, Secretary Lowery, for your initial statement and your responses to our questions. I will now call on the second panel for our hearing today, and this will include the Honorable Jaime Quijandria, executive director at the World Bank; the Honorable Carlos Herrera Descalzi, former Minister of Energy and Mines, vice-dean of the National Engineers Association of Peru, from Lima, Peru; Dr. Korinna Horta, senior economist, Environmental Defense, Washington, DC.; and Mr. Manish Bapna, executive director, Bank Information Center, Washington, DC. We welcome this distinguished panel and look forward to hearing from each one of you. Let me say at the outset that your complete prepared statements will be made a part of the record, and you need not ask for this to occur. It will occur. We will ask that you either use those statements in their entirety or summarize, as the case may be, and I will ask you to testify in the order that I introduced you. This literally will be—let me just make certain I see where everybody has been placed—but first of all we will hear from the Honorable Jaime Quijandria, and then we will hear from the Honorable Herrera Descalzi, then Dr. Horta and Mr. Bapna, in that order. Would you please proceed. AND MINES OF PERU |
lps84433.pdf | 27 | The CHAIRMAN. | Well, thank you very much for that very important testimony. I would like to call now upon Mr. Herrera. MINISTER OF ENERGY AND MINES, VICE-DEAN, NATIONAL ENGINEERS ASSOCIATION OF PERU, LIMA, PERU |
lps84433.pdf | 28 | The CHAIRMAN. | Thank you very much, Mr. Herrera, for your testimony. I would like to call now on Dr. Korinna Horta. ENVIRONMENTAL DEFENSE, WASHINGTON, DC |
lps84433.pdf | 29 | The CHAIRMAN. | Thank you very much, Dr. Horta. I would like to call now upon Mr. Bapna for his testimony. INFORMATION CENTER, WASHINGTON, DC |
lps84433.pdf | 30 | Mr. QUIJANDRIA. | Yes, Mr. Chairman. I want just to give you a piece of information. We had Camisea as the main issue of cafe conversation and headlines of the newspaper for almost 20 years. We're discussing how to do Camisea. |
lps84433.pdf | 31 | The CHAIRMAN. | I see. In Peru, it has been discussed for 20 years. |
lps84433.pdf | 32 | Mr. QUIJANDRIA. | In Peru. The state company should do it. The whole of the benefits should go to the region. So the price the Peruvians, we have paid so far, is that high expectation of the Peru population, that there is no chance of doing any infrastructure project, mining, oil and gas, unless you compromise an important amount of revenues for that population. That's the turning point. |
lps84433.pdf | 33 | The CHAIRMAN. | So that's the political expectation? |
lps84433.pdf | 34 | Mr. QUIJANDRIA. | Yes. |
lps84433.pdf | 35 | The CHAIRMAN. | You start out looking for natural gas. You anticipate that a big percentage is going to go to the poor through infrastructure. |
lps84433.pdf | 36 | Mr. QUIJANDRIA. | They consider they own the reserve, they own the resources, so they are entitled to have an important part of revenues. The problem, Mr. Chairman, is that once we have internalized that and we have decided politically that that is the only way to develop infrastructure, now we have to build that capacity. We have to give them the means in order to spend that money. And the World Bank and IDB, working probably in different regions, are working from the grassroots, giving the most basic tools to the municipalities, to regional governments which were created 3 years ago. Regional governments never existed in Peru. So now we have 24 regional governments with the bureaucracy which is probably oriented to handle services and not necessarily to construct infrastructure. |
lps84433.pdf | 37 | The CHAIRMAN. | So this is 3 years old, the infrastructure, I mean the governments at the local level? |
lps84433.pdf | 38 | Mr. QUIJANDRIA. | Yes. |
lps84433.pdf | 39 | The CHAIRMAN. | And prior to that, the central government ran it all, essentially. |
lps84433.pdf | 40 | Mr. QUIJANDRIA. | So we are in a learning process, Mr. Chairman, that probably will take some years. I don't think that it's going to be solved in a couple of years. |
lps84433.pdf | 41 | The CHAIRMAN. | How does the World Bank intersect now with these new governments, the 3-year-old governments? How does that work? |
lps84433.pdf | 42 | Mr. QUIJANDRIA. | First of all, Mr. Chairman, I think an early engagement is crucial. IDB and World Bank should be present hopefully in the design of the project. The problem with Camisea is that I praise very much the continuity of policy, but there is also costs of continuity. We had to take a process which has already been negotiated through an international bidding process that this government couldn't change. Probably the solution was to say 44 months to construct this complex project is too little, let's extend it, but that was opening again. And something that Camisea has got has been transparency. The government has been very clear to put all the figures on the Web, so you can go anytime, and that's the reason why people really are not satisfied, because they see that there is a lot of money waiting, and they are poor, they don't have services. As Mr. Herrera mentioned, 25 percent of the population doesn't have electricity service, and they say, ''Why? There is money.'' Specifically the people from Cuzco, they are already receiving more than $200 million so far and there are very little results, I have to admit. |
lps84433.pdf | 43 | The CHAIRMAN. | So the local government of Cuzco is not able to plan or to execute, or why? |
lps84433.pdf | 44 | Mr. QUIJANDRIA. | There were local, regional plans. There are no staff trained in order to carry out projects. Our national administrative standards are probably too high for provinces. We have to lower them, and specifically we have to do a lot of training. |
lps84433.pdf | 45 | The CHAIRMAN. | That's a very important set of facts for all of us to consider. The development of local government, as you say, sort of a 3-year gestation period, suddenly $200 million or whatever; and the staff; the expertise; and the new standards; everything that's anticipated by the poor, all coming upon these people. You know, having been mayor of a city in our country, I understand the expectations of the people at the local level, but we had staff. We had an infrastructure of the business community and lots of other people to help. So as we're taking a look at these situations, whether it's Peru or Chad or Cameroon, it's important for us all in a much more sophisticated way to try and understand the governance of the countries, the development of that. But, having said that, it is still a lot of money, and apparently maybe another project coming along which produces more money and therefore more expectations, I suspect. |
lps84433.pdf | 46 | Mr. QUIJANDRIA. | Mr. Chairman, just for the record, IDB gave $75 million to finance the project. CAF, which is the financial Andean corporation, gave $50 million. $300 million was provided by local private investors. But the leverage of IDB has been very high. Although they only participated with $75 million, they practically compromised the whole consortium, even the downstream consortium, which was not involved in the financing, to accomplish certain levels to carry out environmental and social reforms. |
lps84433.pdf | 47 | The CHAIRMAN. | Well, it's a very important point you have just illustrated again. I gave these figures, the total of $1.7 and then over here $135 million. As you say, the leverage from the $135 million has engendered all of these attempts for reform, apparently. So the international development banks were getting their money's worth in terms of the amount of participation to begin with. However, that's the job of the banks. That's the involvement here. If it had been totally private, we would not be talking about it today, I suspect. We do have this international development, including taxpayer money of the United States, of our own citizens, as they contribute to these banks. as this proceeded, this $1.7 billion investment, the objective was energy security for Peru. That doesn't mean that people didn't think about some good things that might happen in a humanitarian way and help poor people at the grassroots, but essentially your judgment is that by and large the Peru Government, as a people, were thinking about energy security, and so they built the pipeline. Now, eventually some other loans came along in this process, but describe a little bit more from your own recognition, and both of the first two witnesses have been heavily involved in decision making in Peru. What sort of energy security did Peru need? Why was there an interest in this kind of investment or seeking it, from wherever it came? |
lps84433.pdf | 48 | The CHAIRMAN. | Well, that's very important testimony, beyond the scope or the capacity of this hearing, which really comes down to the performance of the banks and so forth. Both of you have given such a rich history of Peru in the last generation, through the various administrations and the different objectives, even the most recent political campaign, the division of the country as people take a look at these issues. And they are looking in countries all over the world that have suddenly come into riches, energy resources, and do not have the capacity, and do have governments and do have money. Sometimes the conflicts here are extraordinary, and they are important for the foreign policy of the United States, in understanding in a more sophisticated way the evolution of affairs. You have made, I think, an excellent point, that even if there is a small participation by the World Bank or the Inter-American Development Bank, this offers the leverage that can make great differences for the people as we try to work with Peruvians or other citizens to bring about greater local capacity through our exchange programs, through American NGOs that sometimes participate so productively, to try to make sure that there is some decision making group that can make a difference. And that will have to be the case or there will be broad divisions about these whole projects, either success, failure, or what have you, when the fact is that the revenues are going to come in, the energy security of most countries is going to happen, and the question is whether we take advantage of these new revenues from the production. Well, let me turn to Chad and Cameroon, and I would ask first of all from the experience of both of you as veterans of the trail, literally, of taking a look at developing governments, including the one we're talking about today. What is the status of democracy in Chad? As a practical matter, if you were to apply, as we have talked about metrics, expectations, what is the governmental capacity of that country, leaving aside whether the decisions it is making are humane or equitable? Dr. Horta, would you have a try at that, sort of filling in the big picture of what we're looking at here? |
lps84433.pdf | 49 | Dr. HORTA. | I would certainly like to try. About the status of democracy, Chad just had presidential elections in early May, and its, and basically many people suspect he wants to become president for life. From the outset it was known that these elections were going to be so fraudulent that the opposition boycotted the elections, and independent election observers from abroad didn't even bother visiting Chad for the elections because there wasn't going to be much to observe there. So that is unfortunately the state of democracy. But I would like to mention a very hopeful initiative actually launched by Chadian civil society, a broad cross-section, including the churches, the development organizations, human rights organizations, et cetera. It's a peace and reconciliation initiative that is very promising. It calls upon the government as well as the military, as well as the different rebel groups in the country and civil society, to get together, sit at the same table, and start paving the way in Chad toward genuine democratic reform. I think this is the most promising thing to be done in a country that continues to be wreaked—wreaked by different rebel movements in different parts of the country and by tremendous discontent, including as I mentioned within the ruling ethnic group, the Zagawa group, which comes basically from the Darfur region, the Chadian side of the Darfur region. Concerning government capacity, I could not agree more with my fellow panelists from Peru. Our experience too, is that often the policies are good, the standards are good. What's lacking is the capacity to actually implement those on the ground. |
lps84433.pdf | 50 | The CHAIRMAN. | Who will do the job, yes. |
lps84433.pdf | 51 | Dr. HORTA. | Exactly, and that's of course a very hard thing to do, and it may be time-consuming, but that's where I think from our experience that much of the MDB energy should be focused, building the capacity. And it cannot be done, as the Chad-Cameroon and other projects have shown, it cannot be done simultaneously with the physical construction, let's say, of an oil pipeline or a large dam or whatever. It has to be done before, so that these basic structures, the basic capacities, are in place before you actually get started. I think that has been a central recommendation also of the Extractive Industries Review that I have mentioned. I also wanted to get back to your point where you said that, well, you know, the World Bank just contributes a small percentage of the actual amount that this project costs. This is of course correct, but World Bank financing often does play a catalytical role in the Chad-Cameroon project, and I'm sure in many other projects around the world. In the Chad-Cameroon case, Exxon Mobile made it very clear that they were not going to go ahead with this project without the World Bank's involvement, not because Exxon Mobile needed a few hundred million dollars from the World Bank, certainly not, but because it provided a level of comfort. They knew that the Government of Chad nor the Government of Cameroon would expropriate—— |
lps84433.pdf | 52 | The CHAIRMAN. | That's an important point, that they thought, in terms of the international community, that they needed a framework of governance, of legitimacy that came from this. So, as you point out, we have $4.1 billion coming from somewhere outside of these banks, which is a lot of money, 85 percent. But, in any event, your testimony is that Exxon Mobile, just to name one firm, said, ''However, we want to have the blessing of the World Bank on this business.'' That's important, I believe, as to how any sort of leverage comes into this business. |
lps84433.pdf | 53 | Dr. HORTA. | Absolutely. It's exactly that point, and in addition, you know, to having a global governance kind of structure via the World Bank, the other reason why international corporations do like the involvement of the MDBs is of course because it helps attract many other funding sources into the same project, and therefore makes these projects possible in the first place. Many of them wouldn't take place without the small percentages of cofinancing from the World Bank and the other MDBs. |
lps84433.pdf | 54 | The CHAIRMAN. | Mr. Bapna, would you join in this dialog? |
lps84433.pdf | 55 | Mr. BAPNA. | I surely would be more than happy to. I completely concur with the points that were made earlier about the importance of capacity as a prerequisite to ensuring that many of these policies and practices are actually put in place properly. But I also want to take one or two steps back and say, in addition to capacity, there has to be the commitment—the commitment, the political will to actually make these difficult decisions, and this is where some of the commentary about governance strikes a strong chord in these deliberations. |
lps84433.pdf | 56 | The CHAIRMAN. | In that case, now, for instance we have talked about Peru, and they have developed local governments in the last 3 years or so, but in Chad, how would the political will be exercised? You have the president, apparently president for life and so forth, but who else is involved, or is there anybody involved in terms of this political will? |
lps84433.pdf | 57 | Mr. BAPNA. | I mean, I'll defer to Korinna to speak a little bit more specifically about Chad, but I think the challenge there is that the Bank recognized that there was a real risk in terms of political commitment. And so they tried to put in place a number of mechanisms to address, to try to mitigate the risk of that, in part by having these escrow accounts, kind of an offshore escrow account, in part by having this college, this civil society kind of multi-stakeholder oversight mechanism about how revenues would be used. They also informally conveyed conditions about future lending to the country. But I think what the last few months have demonstrated is that despite that, once a decision is taken to approve the project, much of the leverage that the Bank may have had withers away. And then you saw what actually took place in terms of the decisions that the president took and the corner that the Bank was placed in. And I think that the challenge remains. It's a real challenge, and I think we're still struggling to try to understand how best to assess minimum kind of governance benchmarks or criteria that would justify major investments, major risky investments, particularly investments that—and both these projects are of that case— that are revenue generation projects. The rationale for these projects is not necessarily to serve a broad set of domestic users. It's about generating resources and using those resources wisely, and for those types of projects it elevates the importance that has to be attached to these governance issues. I'd like to perhaps also say that even if one were to take a step back, I'd like to underscore the importance about the process of how these projects are selected, and what I called earlier this concept of a comprehensive or participatory options assessment. In part, I feel that oftentimes the Bank gets caught in a dilemma by having to make very difficult assessments on these particular projects when it is unclear whether or not a truly transparent participatory options assessment has been done beforehand, prior to a project being selected, to find out what is the technically most viable, feasible way to deliver on a particular good. And oftentimes it may not necessarily be the project that is ultimately put forward by the Bank. And so I think if the Bank were to more actively encourage and engage and ensure that a proper options assessment was done upstream, it would diminish the risk that you would end up with having to face a difficult tradeoff on whether or not to support a controversial project. |
lps84433.pdf | 58 | The CHAIRMAN. | I am just curious. You mentioned the college, and this is sort of the hope of an independent group of people in society who are offering advice. How do they fit in with the president of Chad? What view does he take of these people? Are their civil liberties threatened? Are they free to editorialize and make speeches? How do things work in Chad, so that there is some check and balance there? Do you have a thought about that, Dr. Horta? |
lps84433.pdf | 59 | Dr. HORTA. | Power in Chad is in the hands of the president, and the oil project has further consolidated his grip on power because he has means available to him now that he didn't have before. It's like all the taxes and the customs revenues that he is receiving through the oil project. He controls—he largely controls them. Now, the College de Controle, this oversight committee of course is a very good idea, and the Treasury Department actually deserves thanks to have—— |
lps84433.pdf | 60 | The CHAIRMAN. | That's the U.S. Treasury Department, right. |
lps84433.pdf | 61 | Dr. HORTA [continuing]. | The U.S. Treasury Department deserves to be thanked for the technical assistance it has provided to this college. Its composition is both people from the governmental side, actually the majority, and civil society. And under very difficult circumstances—they have no autonomous financing, they are very underfinanced, they are understaffed, they have a lot of difficulties—even under those circumstances, they have tried to do and have done a very, very good job. Last summer they issued a report that the Financial Times actually reported on extensively, showing that much of the money that they had a chance to review was lost to corruption, that there was no comparative bidding, there was overpricing, there were all kinds of problems. Actually in this same Financial Times article, the Bank expressed already then—this is, you know, just a year ago— a big concern about what was actually happening to the revenues in Chad. But the main problem of this college is that it can issue a report, but then it cannot do anything further. There is no functioning judicial system in the country. There would be no court, you know, where the college could turn to and say, ''Here, we have had all these corruption issues. Can you further look into this and investigate, indict, convict, whatever.'' No, it just stops there. The college lives by the grace of the international donor community, the World Bank, the U.S. Treasury Department, and it's doing valuable work but it's of no real consequence. So one of the things that we would hope will happen as part of the renegotiation that the World Bank is currently having with Chad on the revenue management would be a strengthening of the college, and providing it with all the resources that it needs to function properly. |
lps84433.pdf | 62 | The CHAIRMAN. | I think we would all encourage that that be the result of these renegotiations. Now, just to be devil's advocate for a moment, skeptics coming into this hearing at this point would say, ''Now, get real, folks.'' Here you have a situation in Africa, in which I saw this in a country that was not too far from Chad, in Libya, for example. I spent 2 nights in the Corinthia Hotel there in Tripoli, and there were a large number of people from India and China, so I was inquiring about why everybody is here in such numbers. Among those who wanted to converse about the subject, they in essence said, ''We're here to pin down about the last square mile of the country in terms of preemptive rights for energy resources, and for that matter we are about this task in many states in Africa. Libya is not the only one.'' In short, in a competitive world in which countries are seeking their energy security, having large populations like India and China—and I don't fault them for looking out after their citizens, how they're going to progress—they are thinking ahead. Where are the resources, anywhere on this earth, and what are the values, and how do you bid them up in competition? Now there are some United States interests involved there, but at that particular time we had just a very small number of consulate people there. That has been changed as a policy of our Government, subsequently. We're going to establish again an embassy and establish the possibilities of dealing with Libya and the area. But at the same time the Chad situation illustrates, at an earlier time but maybe evolving if Chad develops more resources of this sort, our testimony here in the committee records, which is derived from your expert witnesses, that about 118 million barrels of oil were produced there in Chad. You know, that's $10 billion worth of revenue, more or less, at world prices, coming into a relatively small country, and the meter is still running as we're talking today. More barrels are being produced. And by and large, the world rejoices. Thank goodness that is the case, that the supply side, which is so narrow over world demand, is somehow being helped, even if by somebody who seems to be taking on authoritarian characteristics. And so these compromises keep occurring. I emphasize this because I admire the leadership of the World Bank in trying to tackle this. You know, our purpose at this hearing is not to pounce upon the development banks. They are the heroes of the situation, to the extent that they have any leverage whatsoever in what we have already described as two situations in which the tremendous bulk of the money came from elsewhere. They had nothing to do with it. But because of these other loans, and the interest of our Treasury Department which you have cited and which I would again, and our State Department and others, there begins to be some hope for a dialog here. It could be ignored by the President of Chad, but there is this college group or others who are at least piping up and giving an opinion with regard to this. But the way the world works, things are not necessarily working in favor of those who are trying to build democratic institutions. And that's a whole subject for a different hearing, how energy intersects with democracy, but it intersects in a big way here, in Chad. And so the question is, how do we support the World Bank, the reforms that are occurring internally, which I have cited today, and continue that movement which I think is important, and which perhaps we did not see prior to a short time ago. We certainly applaud this movement. I would just ask either one of you, Dr. Horta, Mr. Bapna, do you have some optimism about that trend, with Chad as a citation, but likewise other situations in which you are both involved? Do you see some hope for this civil dialog to progress to the benefit of infrastructure that helps support people in the countries that are being served? Yes, sir. |
lps84433.pdf | 63 | Mr. BAPNA. | Just a few points in response to that very important question you posed. There is no doubt that the competition for energy resources around the world today is escalating incredibly, and that even if the multilateral development banks were not to support some of these projects, clearly there is—— |
lps84433.pdf | 64 | The CHAIRMAN. | They are going to do it anyway. |
lps84433.pdf | 65 | Mr. BAPNA. | Many of them, not all, but many of them will go ahead in any case. |
lps84433.pdf | 66 | The CHAIRMAN. | Yes. |
lps84433.pdf | 67 | Mr. BAPNA. | But I think, to this point, we need to avoid what oftentimes is a common fallacy. That is, just because the involvement of a development bank improves a project doesn't mean that the bank must be involved with any project that it can improve. To put it perhaps in another way, just because there is a poorly designed, destructive project that the bank can do better, doesn't mean that the bank should be involved in that project. It's also important to note that the banks collectively committed in 2005, $20 billion in infrastructure, and that's a drop in the bucket. The amount of overall—the need for infrastructure lending is considerably orders of a magnitude higher than that. So the question that I believe the development banks have to ask is how to be as selective in their investments. As the infrastructure needs to escalate, they have an opportunity to really model the way to support innovative, truly pro-poor infrastructure projects that emerge in a transparent participatory process. They should be, in light of this kind of broad landscape, particularly selective in what they actually support. They should uphold the highest international standards on transparency, on corruption, on participation, on environmental and social impacts. And on that, it's useful to note that the United States has oftentimes been a lone voice in advocating for stronger standards on the board, and there is a need to develop broader political support from other members of the board of directors for higher standards on these issues. I think in terms of where, let's say, the World Bank is in terms of its ability to take on this challenge as the need for infrastructure escalates, it's a bit of a mixed bag right now. There is the recent report that you referred to earlier in your opening remarks or in your questions. That was a particularly candid and honest, reflective report that I think the Bank should be applauded for in terms of preparing. Whether or not they will operationalize some of the main lessons that were learned remains to be seen, but I think that at least they have a better sense of what some of the mistakes were in the past. But I would like to highlight a recent development that took place that's somewhat troubling, which is, just about 2 weeks ago or so the World Bank dismantled its environmental and social sustainable development vice presidency and integrated in with the infrastructure department. And despite some of the rhetoric that indeed this will allow better integration, better mainstreaming, many of us on the outside are particularly concerned that this shift signifies subordinating common environmental and social issues to the need to lend, the need for infrastructure. So to your question about will the Bank learn from its mistakes in the past, I think the jury is still out. I remain committed to trying to support them in doing so, but I think we could use further attention on this matter. |
lps84433.pdf | 68 | The CHAIRMAN. | Let me just ask if any panel member has further comment at this point. Yes, sir. |
lps84433.pdf | 69 | Mr. QUIJANDRIA. | Thank you, Mr. Chairman. I was invited to talk about Camisea, but I know some facts about Chad-Cameroon, being a member of the board of the World Bank. |
lps84433.pdf | 70 | The CHAIRMAN. | Yes. |
lps84433.pdf | 71 | Mr. QUIJANDRIA. | My impression is that we have had very important pressure not to finance infrastructure projects, and if you see the figures of the lending process of the World Bank during the last 10 years, you will notice that infrastructure went down $4 or $5 billion before Mr. Wolfensohn decided to take gain and not work the curve. The extreme case that I have been familiar with is the case of a hydro project, Nam Theun 2 in Laos, which took 12 years to come to the board, and we spent more than $15 million developing the project, which is more than the total amount of aid that the World Bank was giving to Laos. So this is the kind of lessons that we learned that probably gives us a very clear idea that we should not only be engaged, but we have to be very clear that the additionality of the Bank is very clearly to be proven. It's clear that the Bank has a tremendous 60 years of experience on infrastructure. Probably no other institution, financial institution, in the world has had the experience that the Bank has with roads, hydros, and whatever. So we think that we should remain engaged. And, second, I want to tie this to a comment on energy security, and this is specific for our region. My difference of opinion with Mr. Herrera probably is that he is pessimistic about the results that we are going to find and I am optimistic. I think that we should think in terms of developing the infrastructure because we are going to find more gas. There's no question about it. When Bolivia signed the contract with Brazil to sell it 10 billion TCF, the reserves at that time were 6, and now Bolivia has 35 or 40 billion reserves. So my hunch, Mr. Chairman, if you allow me, is that we are going to find more gas, and probably will be very shortly dealing with the problems related with it. As to the kind of project that this institution finances, I couldn't be more in agreement that we should avoid the kind of projects which are probably not the consistent. This fortunately is not the case of Camisea. We have debated Camisea for 20 years, as I told you before, so this was very ripe and a very good project to be financed, and I think the involvement for IDB has been not only beneficial for the Peruvian Government and for the companies but also for IDB. They have learned a lot on this project, although there have been quite a lot of criticisms and probably a lot of discussion in the newspapers on it, but it has been beneficial, all in all. |
lps84433.pdf | 72 | The CHAIRMAN. | Concluding on an optimistic note there about additional reserves as well as improvement of capacity and learning. |
lps84433.pdf | 73 | Mr. HERRERA. | Yes, Mr. Chairman. Well, being pessimistic or optimistic, it's relative. I prefer to be realistic, and the source of realism is the history. In Peru in the 1970s, for first time we are led to be, after so many years, net importers of oil. And our government and military, our leftist military at that time, proceeded the visit of a very well-reputed German geologist, and he says more or less that Peruvian jungle was like the Mariciabo Lake. It was floating in oil. They have a grounded state oil company, Petroperu, and of course Petroperu has not enough equity or capital in order to drill so much. They make three drills in three different places, and they found oil. So on the theoretical basis for being floating on oil, and after three successful drillings we shall suspect that we have plenty of oil. We need to bring the oil to the coast, so we built a pipeline, an oil pipeline. Even with the technology of that time—it doesn't spill like today's with highest technology. And one problem was, what will be the diameter of this pipeline? Because it will be related to the capacity. So it was dimensioned for the oil already found and for what we will find in the future. It happened 30 years ago. We never found more oil that could be economically transported. So I just think this story says it happened to us once. Are we going to make the same mistake for the second time? I am also optimistic in the sense that we are going to find gas, so I say as the original contracts work, let's dedicate to exportation the gas that we are going to find, and let's dedicate to Peruvian security the gas that we have already found, with investment that means expending $500 million in the jungle in that time. But let's not dedicate the gas that we already have to exportation and wait to find new gas for certifying the growth of the country. This is practically the main difference. And regarding what happened to Camisea I, it's in the written testimony but I probably forgot to say that an investigation has been asked about how the project has performed. What is clear is that there have been five spills, and we can realistically suspect that everything is not well-built. There are failures in some place, either in the design, either in the construction of the pipeline, or more probably in the soil. But we need to clarify that before, because only source of gas, significant, relevant gas in Peru is Camisea, and we are linking the economic area along the coastline to the Camisea fields through one pipeline. So the reliability of the supply depends on this one pipeline, and we cannot continue growing with the supply to the commercial areas, to the central economic areas, without being sure that at least this pipeline shall perform well. According to the contracts, it has to meet certain levels of availability per year. In the 3 years that it is working, not a full year in 2004, not a full year in 2006, it has not committed the compromises. It has performed far below of what it has been compromised. Then we need to be sure in the future that it will work properly. And I will recommend to tie Camisea second stage to being sure that Camisea first stage pipeline will work properly. Thank you, Mr. Chairman. |
lps84433.pdf | 74 | The CHAIRMAN. | Good counsel. |
lps84433.pdf | 75 | Dr. HORTA. | Yes. Just to get back to your question about is there any grounds for optimism, are there some positive trends, I remember putting exactly that same question to my African colleagues in Chad and Cameroon. And the answer that I got was, ''Of course.'' And the positive trends are the strengthening of civil society organizations in those countries, and sometimes a large project also helps to catalyze a civil society movement. What we need to take care with, of course, since it is a very fragile civil society still, is that large-scale lending does not contribute to undermining democracy. Moving large amounts of money is always also a political thing, and we can inadvertently, you know, just further entrench authoritarian regimes if you don't pay careful attention to the governance criteria that should be in place before carrying out this type of investment. |
lps84433.pdf | 76 | The CHAIRMAN. | Well, that's certainly good advice. I suppose the dilemma is, however, given the extraordinary amount of money involved in energy projects in particular, we are fated one way or another in this role to have a lot of cash. And the question then will be how the civil society progresses even in the face of a large amount of money, often in the hands of the governments, some better than others. |
lps84433.pdf | 77 | Mr. BAPNA. | Just a quick comment. We talked a lot today about the correlation between large, high-risk infrastructure and economic growth. Mr. Lowery, Secretary Lowery, mentioned that in the earlier panel as well. |
lps84433.pdf | 78 | The CHAIRMAN. | Yes. |
lps84433.pdf | 79 | Mr. BAPNA. | And I want to make a point that not all growth is created equal. Some types of growth are much more pro-poor than others. And the question before the multilateral development banks, which have an explicit poverty mandate, is now to most effectively catalyze pro-poor growth and actually reduce poverty on the ground. 1 Although the project was designed by the government to mainly help the development of the domestic market in Lima, there is a significant generation of export revenue since the liquids, which are extracted together for the gas, are totally exported. This reminds me a bit about that old joke about economists, that we know that the ability of infrastructure to reduce poverty works in theory, but we are not yet sure that large infrastructure reduces poverty in practice. And in terms of the optimism, I do think there are reasons to be optimistic, and I think that if we can encourage the development banks to shift to more forcefully investing in smart infrastructure that has more direct and immediate benefits for the poor—these are oftentimes smaller, they are less costly, they are decentralized, but they are approaches that have been proven to work—and I think if we could do that, we would go a long way toward helping infrastructure reduce poverty. Thank you. |
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