• IMF and deforestation in Indonesia
• Laos: Did The World Bank Fudge Figures to Justify Nam Theun 2?
• Peru: IDB funds the Camisea gas project that endangers biological and cultural forest diversity
• Uruguay: Campaign against IFC funding of pulp mill projects

 

- IMF and deforestation in Indonesia

Due to a prolonged economic crisis and the devaluation of the Indonesian Rupiah in early 1997, Indonesia was forced to seek aid from the IMF, and by the end of October a first assistance package was agreed upon. The US$43 billion financial rescue package included some structural adjustments or reforms stipulated in the Letter of Intent (LOI) that the government of Indonesia should follow. The then President Suharto signed the first LOI with the IMF in October1997, focussed on banking sector reform, but without including any reference to the forest sector or the environment.

By early January 1998, the government of Indonesia had failed to implement the commitments of the first LOI and the country plunged into a deeper economic crisis. Despite the failures, a second LOI was negotiated and signed on January 15, 1998. The IMF announced that the second LOI would accelerate and broaden the earlier commitments to reform.

The first major set of reforms affecting forests were contained in the IMF's January 1998 LOI with the Indonesian Government -the documents which spelled out the loan conditions Indonesia had to agree to secure a US$1 billion loan as part of a US$43 billion bail-out package. A striking addition to the first LOI was a series of forest-related (6 points) and other environmental measures (4 points). These included major commitments to “reduce export taxes on logs, sawn timber, rattan, and to impose appropriate resources rent taxes” (point 37) and to “remove restrictions on foreign investment in palm oil plantations” (point 39).

Ironically, while the LOIs called for greater transparency and consultation with civil society, the process of drafting the agreements themselves was anything but transparent. The contents of the LOIs are still not made available for public scrutiny before signing. There is no wide participation by NGOs and especially by those most affected by the LOIs conditions.

Through IMF’s LOIs packages, the World Bank steered the Indonesian government to implement the IMF recipes of its structural adjustment loans. LOIs became the ‘holy bible’ directing the country’s economy and its natural resource management policies.

In 2002, WALHI/FOE Indonesia commissioned an independent study to evaluate the impact of the implementation of the LOIs on forests and the environment. The study was conducted by a team lead by a prominent forest economics expert of the Agriculture Institute of Bogor. The study concluded that the state budget for public expenditures in environmental management had decreased and that economic and trade liberalization had increased the exploitation of natural resources. Some findings of the study are summarised below.

The log export liberalisation (point 37, LOI 1998) provided financial incentives for log export. Although reducing the export taxes on timber may have improved the price of the undervalued timber in Indonesia, which could lead to the improvement of the efficiency in the extraction of raw material and serve as an incentive to conservation efforts, this policy has in fact been catastrophic.

The log export activity was encouraged but at the same time it increased the deficit of timber supply for the domestic wood processing industries. Ironically, despite the shortage of wood supply, the forest-based industry was even increased, especially production in the pulp and paper mills. As a result, the timber for the industry was supplied from illegal and unrecorded sources. Furthermore, since the timber supply from logging concessions decreased, the demand of the timber from conversion forests increased.

The same trend basically happened with the policy of liberalisation of investment in the oil palm plantation sector (point 39). This policy has been matter of controversy since it was launched, because it was totally contradictory with the Bank’s and IMF’s commitment to reduce forest conversion in Indonesia. Removing restrictions on foreign investment in palm oil promoted a greater expansion of oil palm plantations at the expense of forests. Together with previous Indonesian government’s policy, this condition opened up the country for further forest conversion. According to the study, 80% of oil palm plantations was established by converting natural forests.

Although improvements in some aspects of governance and transparency (for example calls for reform of concession regulations, introduction of performance standards and the dismantling of cartels) could clearly benefit both forests and government revenues, other objectives such as reducing export taxes on timber were just as likely to offset those gains. A commitment to halt forest land conversion was inconsistent with the removal of restrictions on the export of palm oil and on foreign investment in the sector -a move that was likely to accelerate the rate of forest conversion to plantations. The measures did nothing to address the underlying structural causes of deforestation and degradation.

Since the 1997 economic collapse, the World Bank and IMF have played a direct role in decision-making affecting forests and forest peoples, as they press Indonesia to keep up with debt repayments. These institutions must accept joint responsibility for forest destruction and the resulting marginalisation of communities and start prioritising the needs of the poor over the interests of international finance.

By Longgena Ginting, WALHI /Friends of the Earth Indonesia, E-mail: ginting@foei.org

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- Laos: Did The World Bank Fudge Figures to Justify Nam Theun 2?

When the World Bank approved US$270 million in grants and guarantees for the controversial one thousand megawatt Nam Theun 2 (NT2) hydroelectric dam in Laos on 31 March of this year, most of its Directors were convinced that the project’s economic benefits outweighed its environmental and social downsides.

The reservoir behind the Nam Theun 2 dam would flood an area of 450 square kilometres, home to 5,700 Indigenous People and habitat to endangered species such as the Asian elephant and white-winged duck. Water would be transferred from the Theun River to the Xe Bang Fai, severely changing water flow regimes in the Xe Bang Fai upon which over 120,000 depend for their livelihoods.

But there is evidence that Bank staff fudged its economic appraisal of the dam, and that erroneous assumptions account for more than the alleged net economic benefit of the project. A team comprising Thai university economists and a public interest energy analyst became aware of the Bank’s erroneous assumptions and their impact in the course of a lengthy correspondence with the Bank.

The World Bank appraisal concludes that “the decision to purchase NT2 power offers significant savings to the regional power system”, and that building NT2 will produce net savings of $188 million over the lifetime of NT2 compared with using natural gas-fired generation to produce the same amount of electricity. About 95% of NT2’s electricity will be sold to Thailand.

The public interest researchers investigated the assumptions upon which the Bank’s $188 million savings claim was calculated, and how these assumptions changed between a widely circulated draft version of the appraisal and a final version released just a week before the Board met. One striking finding was that in the final version of the appraisal, Bank staff had jacked up the “variable operations and maintenance (VOM)” cost estimates for the gas-fired alternative by 1240 per cent compared to draft version assumptions. The change (from $0.564/MWh to $7.000/MWh) is only discernable by comparing draft and final versions of two tables, one printed in 6-point font and another in 5.5-point font, in the middle of the study.

The doctored figure is 1310 per cent higher than the Thai electricity authority’s estimate of $0.5358/MWh. It pushes the estimate for operations and maintenance cost of the gas-fired alternative to the dam to more than triple Thai benchmarks, and more than double the highest international benchmarks that the public interest researchers could find.

By making electricity from natural gas appear more expensive, alterations to the natural gas VOM assumptions account for US$156 million of NT2’s claimed $188 million savings. Revealingly, this amount is more or less what was needed to offset rising costs and declining benefits that the final draft had to accommodate, including a US$101 million increase in NT2 project development costs and removal of an unwarranted $20 million NT2 greenhouse gas credit.

The researchers found that the Bank’s economic analysis of NT2 was also riddled with many other incorrect assumptions that helped make the dam look good.

First, the analysis covered up the extent to which NT2 would actually reduce the economic benefits from electricity production of another dam, Theun Hinboun, from which it will divert water. The Bank inexplicably valued each unit of electricity produced by Theun Hinboun at only 1/3 that of each unit produced by NT2. That makes NT2 look $51 to $63 million more attractive than it would have otherwise.

Second, the Bank’s analysis neglected to take into account four power plants totaling 2800 megawatts to be built by Thailand’s electricity authority. In the event that future demand for electricity in Thailand is low, constructing NT2 would mean that these power plants lie idle, accruing costs but not providing benefits. The Bank’s economic appraisal of NT2 considers a scenario in which electricity demand is low, but it fails to include these power plants. Including just one of these “omitted but committed” power plants would reduce overall NT2 savings by another US$20 million.

Third, the Bank failed to incorporate the results of a study it itself had commissioned that found that it would be cheaper to invest in 1225 megawatts of energy conservation and 216 megawatts of renewable energy than to build NT2. It is hard to know exactly how much this inflates the “savings” attached to NT2, since the calculation would require re-running the entire economic model, and the Bank has not made the spreadsheets and relevant economic data publicly available.

Adding the impact of the errors discussed above, the total is at least US$227 million, far exceeding the project’s US$188 million alleged savings.

In addition, the Bank makes repeated false claims that its economic modeling considered “only downside risks” that “could be expected to pose the greatest test to project viability, i.e., conditions of lower than expected demand, lower than expected fuel prices, and higher than anticipated NT2 capital costs.” In fact, the Bank based its risk assessment on the assumption that construction costs could be “low”, yielding an economic windfall for the with-NT2 scenario. If the Bank’s analysis actually employed its purported scenario selection then NT2 would look an additional $51 million more costly.

An independent investigation must be conducted into the irregularities in the NT2 economic appraisal and the World Bank must reconsider its role in the NT2 project. It is not too late to correct the errors and evaluate the project on its true merits. Canceling the project is still likely to be better than committing Thai ratepayers to an economically inferior choice. Investors are affected as well, as many of the World Bank’s bogus figures strongly inflate the commercial appraisal of the project.

The economic appraisal discussed above is Robert Vernstrom, Nam Theun 2 Hydro Power Project Regional Economic Least-Cost Analysis: Final Report March, 2005 at http://siteresources.worldbank.org/INTLAOPRD/Resources/RELC-2005-final.pdf.

The draft version of the economic appraisal report is available at: http://siteresources.worldbank.org/INTLAOPRD/491761-1094074854903/20251513/Economic.pdf.
A fully referenced version of this article is available at www.palangthai.org/docs/NT2EconMalfeasRefs.pdf .

The researcher’s calculations of the impact of the Bank’s erroneous assumptions are available at www.palangthai.org/docs/NT2EconMalfeas.xls

An archive of correspondence with the World Bank Country Director for Lao PDR and Thailand (cc’d to Bank Board) concerning these issues is available at www.palangthai.org/docs/RemarkableAssumptions.pdf.

By Christopher E. Greacen, Ph.D., Director, Palang Thai, E-mail: chris@palangthai.org ; and Decharut Sukkamnoed, Lecturer of Economics, Kasetsart University, E-mail: tonklagroup@yahoo.com

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- Peru: IDB funds the Camisea gas project that endangers biological and cultural forest diversity

Camisea is the greatest energy project in the history of Peru. This project involves the extraction of natural gas in an area known as Lot 88, located on both sides of the Camisea River, one of the richest biodiversity areas in the world. The cost of building the whole project amounts to 1,600 million dollars, including the exploitation and processing of gas and the construction of gas pipelines that will pass by the Andes Cordillera before reaching the coast for distribution.

The deposit contains an estimated 11 trillion cubic feet of gas and 600 million barrels of the condensed substance. Half the production will be exported to the United States to supply the energy market on the West Coast. The cost of these exports is already being paid by the indigenous peoples, given that close on 75 per cent of the deposits are located within the indigenous peoples’ reserve and they have been forced to come into contact with the Camisea consortium, thus violating their internationally recognized rights.

Furthermore, Camisea is home to the Machiguengas and to the native communities in voluntary isolation such as the Nahua, the Yora or Kugapakori and possibly to the Kirineri. The Camisea Shivankoreni, Segakiato and Cashiari communities have settlements close to the wells, with a population of approximately one thousand inhabitants. In order to survive, these communities depend on farming, gathering, hunting, fishing and the extraction of forest products. These activities are now endangered by the expansion of gas extraction projects.

The Camisea project’s plant for the extraction of natural gas is located in a region with abundant biodiversity. According to the Smithsonian Institution, 747 species of trees, 150 species of mammals, 75 species of amphibians, 83 species of reptiles, 156 species of fish, 420 species of birds and hundreds of species of invertebrates are to be found in this area.

A major victory in the campaign against the Camisea project was in August 2003 when the Export-Import Bank (the United States official agency funding exports) refused to give loans in relation with the Camisea project (Lot 88). The Board of Directors of this Bank took into account the social and environmental risks of the project that the project proponents were unable to minimize.

However, the Inter-American Development Bank (IDB) still decided to grant a loan for 135 million dollars to the project. Little did it matter to them that the company does not abide by international standards such as avoiding contact with indigenous peoples in voluntary isolation. Nor did it seem important to them that the zone for breaking bulk is located in the buffer zone of the Paracas National Reserve, the only protected marine-coastal area in the country.

In this way, IDB ignored its own mandate, which states that “The two main objectives of the Bank are to reduce poverty and promote social equity and achieve sustainable economic growth.” In fact the project is already incrementing poverty, increasing social inequity and making sustainable development impossible.

An agreement between civil society and the IDB has promoted the implementation of an ‘independent monitoring’ of the Camisea Gas Project, which still does not guarantee that the impacts of the project will be reverted but there will be more information on them.

Among the social impacts already suffered by the population in the project’s area of influence are the following: a decrease of fishery resources affecting the families’ food input due to contamination of the water with oils, grease, detergents and inadequately managed waste. The health of the indigenous peoples has deteriorated, the communities affected by the passage of the gas pipeline stated that the companies have not paid administrative rights, nor have they given employment to the inhabitants. They have destroyed highways, bridges and irrigation channels and dwellings have been damaged.

Less than five months after the project’s operations were initiated, on 22 December 2004 at Km. 8.8 the gas pipeline of the Camisea Project was ruptured, causing a hydrocarbon spill that went into the Kemariato watercourse and from there to the Urubamba River. “Our communities have been seriously affected and on 20 January when I was in the zone, dead animals were still being found on the banks of the Urubamba” stated Roger Rivas of the Río Urubamba Machiguenga Council.

Furthermore, among the environmental impacts, mention may be made of deforestation for right of way, contamination of rivers, acoustic pollution, soil erosion and the consequent alteration of the flora and fauna in the project’s area of influence.

Regarding impacts on the global environment, the reserves of the Camisea deposits will release an estimated 687.2 million tons of carbon dioxide into the atmosphere. This project will be the sixth largest in the Americas to be financed by an international funding agency, on having the greatest potential for carbon dioxide emissions. Camisea will generate, following its life span, over 23 times the total fossil combustion in relation to CO2 presently released by Peru per year (Caffrey, 2002, report by an independent consultant for COMARU and AIDESEP). All this taking place in a world that has its future compromised by carbon dioxide emissions. Therefore the IDB is contributing to climate change.

In the Urubamba, the environmental and social impacts continue and the capacity of the population to defend their territory is limited. To worsen the ecosystems’ situation, a new project for exploitation will further increase the impacts on forests, natural water reserves and the flora and fauna of a region possessing natural values of national and international scope.

In fact, in September 2004, Perupetro signed a contract for the concession of Lot 56 with the Pluspetrol Consortium for Camisea I. Lot 56 is also located in the lower Urubamba, with an area of 58,500 hectares to the north-west of the present Lot 88. Within Lot 56 an area classified as primary forest is located, home to the Kirineri, a highly vulnerable population in voluntary isolation. Five hundred million dollars will be invested in the extraction of liquid gas; additionally 1,100 million dollars will be allocated to increasing the capacity of the Camisea gas pipeline to transport the gas to the coast. The exploitation of Lot 56 (Camisea II) will be the first component of a project to export liquid gas.

The second component consists of a liquefaction plant (Liquid Natural Gas) that will convert the gas into liquid for export. This plant will be built in the Pampa Melchorita to the south of Lima.

The remoteness of the project makes it impossible to carry out the relevant dissemination of the impacts that it causes. Only the populations that are located in its area of influence see how, day by day, their natural environment providing them with food and social security is transformed into a crossing of enormous pipes, transporting an element that perhaps for them will never mean an improvement in their quality of life.

This project will lead to the disappearance of native populations in voluntary isolation, such as the Kirineri and will devastate a territory of unequalled importance. Worse still, the Government is now promoting the exploration of other lots (57 and 58) in the same Camisea zone, adding further impacts to the already existing ones.

Will IDB also fund these new destructive projects?

By Patricia Patrón, Friends of the Earth Peru, e-mail: ppatron@labor.org.pe

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- Uruguay: Campaign against IFC funding of pulp mill projects

Uruguay is in the sights of the pulp industry. The Finnish multinational company, Metsa Botnia and the Spanish company Ence are proposing to install two pulp mills to produce bleached eucalyptus pulp (using ECF process with chlorine dioxide) for export, with Botnia producing a maximum volume of 1 million tons per year and Ence 500,000 tons. The pulp mills would be installed on the banks of the Uruguay River, which Uruguay shares with Argentina, in the locality of Fray Bentos.

The projects have given rise to increasing citizen opposition both in Uruguay and Argentina, with a multitudinous meeting of both peoples on the General San Martin Bridge that joins the two territories (see WRM Bulletin No. 94) as the high point of the campaign.

These much questioned pulp mills – their very scale constitutes a high risk of river and atmospheric pollution – will also be linked to the large scale monoculture tree plantation model that will supply them, with impacts that have also led to strong complaints (see WRM Bulletin No. 68).

FAO, the World Bank and JICA (the Japanese International Cooperation Agency) have been instrumental in the creation of the mass of trees for pulp (see WRM Bulletin No. 83), in this country where trees grow quickly, labour is cheap and environmental control is very weak, as is the power of a State conditioned by the foreign debt generated over various decades, especially during the military dictatorship in power between 1973 and 1984.

Now the IFIs have entered into action. To carry out their business, the Metsa Botnia company has requested a loan of 100 million dollars from the International Finance Corporation (IFC, a member of the World Bank Group that provides loans to the private sector). At the same time the IFC will also facilitate a loan of another 100 million dollars through private banking for this project. Ence has also just requested a loan from IFC for the installation of the pulp mill that it hopes to start building in October 2005.

Hundreds of organizations in Uruguay, Argentina and around the world sent a letter to IFC, asking it not to grant either the loan already requested by Metsa Botnia, or the one we know will be requested by Ence, due to the serious impacts that the installation of pulp mills will generate in Uruguay. In the letter, the signatory organizations set out the following concerns:

In the first place it is important to highlight the scale of these undertakings and their possible accumulated impacts in the event that they are effectively implemented.

Secondly, the Metsa Botnia environmental report has been criticised in detail by a group of technicians linked to the Uruguayan environmental group, Guayubira.

Thirdly, neither Metsa Botnia nor Ence carried out any serious study on the possible negative social impacts of their projects, either in the matter of foreseeable loss of jobs related to the liquid effluents and to gaseous emissions (with a strong and disagreeable smell) of the pulp mills, or of the possible impacts on the health of the local population. Furthermore, both companies have exaggerated the number of “indirect” jobs that they will generate, handling figures with no basis whatsoever.

In the fourth place, the installation of one or both pulp mills will imply an increase in the area presently devoted to monoculture tree plantations. It should be noted that serious environmental and social impacts are already to be observed in the existing eucalyptus plantations, which would become even more serious in the event that the area under plantation were to be increased.

It is also important to point out the impacts that one or both plants will have on the use of the country’s highway facilities due to the traffic of hundreds of trucks with 40 ton loads or more.

There are other, unresolved problems regarding the installation of both plants:

1) An international conflict that has not yet been formalized with Argentina linked to the possible contamination of the Uruguay River, shared by both countries.

2) Questions on the legality of granting a free trade zone to each of the two companies that intend to install pulp mills.

3) Questions regarding the legality of using enormous volumes of water and their possible contamination following the adoption of a constitutional reform on water at the last elections.

Finally, the growing social opposition to these projects should be noted, both regarding the eucalyptus plantations and the pulp mills.

For the above reasons, the signatory organizations requested the International Finance Corporation not to become involved in the Metsa Botnia project nor grant it any loans, given the fact that the installation of one or two pulp mills will result in serious environmental and social impacts that will do nothing to solve the problems of the country and its people, but only contribute to make them more serious.