4 December 2003
by Kay Treackle, Bank Information Center, September 1998
Introduction and Background on Yacyreta
Introduction
On December 26, 1996, the World Bank's Independent Inspection Panel recommended that the Bank’s Board of Executive Directors authorize a full investigation of one if its most notorious development projects — the Yacyreta Hydroelectric Dam, located on the border between Argentina and Paraguay. The recommendation was in support of a claim submitted to the Panel by Sobrevivencia/ Friends of the Earth, a non-governmental organization (NGO) in Paraguay. The claim, which had been filed in September 1996, asserted that the project had "serious impacts on [local people’s] standards of living, their economic well-being, and their health" and that the harm was caused by violations of World Bank and Inter-American Development Bank environmental and resettlement policies, among others. Yacyreta was the sixth claim filed with the World Bank’s Inspection Panel since its inception in August, 1994, and the third that the Panel had recommended for an investigation. The Panel’s recommendation was based on a preliminary assessment of the facts of the claim, a review of internal documents, meetings with Bank staff, government officials and the implementing agency in Argentina and Paraguay, and a field visit to the project site and affected communities.
This paper will evaluate the Inspection Panel process at the World Bank. The paper describes why the claim was filed, what happened during the several phases of the 2-year-plus process, and how what had been intended as a procedural process in an international institution turned into a political process involving international NGOs, local grassroots social movements, government officials, Bank staff and the Board of Directors of the world’s most powerful development institution. While the Yacyreta project is a colossal mistake when examined from just about any angle — financial, economic, political, social and environmental — this paper will highlight the Bank’s failures to protect the environment and compensate displaced people in violation of their own policies. I also hope to illustrate how local citizens, with support from international NGOs, have used the Bank’s new accountability mechanism to pressure for justice, accountability and solutions to their problems. The paper will explore several questions: What does it take for citizens to use the Inspection Panel process? What are the obstacles that Bank has constructed to avoid accountability? What are the outcomes of the Panel process from the point of view of the affected people? And finally, is accountability possible? I argue that while the process has been daunting for the claimants, it has had quite positive results particularly because it galvanized local citizens to press for greater political space in Paraguay to assert their rights. However, from the standpoint of accountability at the World Bank, the conclusions are less optimistic.
Background on Yacyreta
One of the largest and most complex construction projects ever undertaken in Latin America, the Yacyreta Hydroelectric Dam straddles the Parana River between Paraguay and Argentina. The dam is a joint project between the two countries that has been under construction since 1983. Downstream from the cities of Encarnacion, Paraguay and Posadas, Argentina, Yacyreta is 83 meters high and 67 kilometers long; if it is ever completed the dam will generate 3100 megawatts of electricity for Argentina. It crosses Yacyreta Island at the Apipe Rapids and has submerged both the island and the rapids in a lake formed when the dam’s 2 spillway gates were closed in 1994. Ultimately, the 250 km long reservoir will cover 1650 square km. Even as international institutions are rethinking the wisdom of generating electricity from such large-scale hydroelectric dams due to their massive social and environmental impacts and enormous costs, the Yacyreta project is an anachronism to an outmoded development model. Still unfinished after over 15 years of construction, the dam has been called a "monument to corruption" by Argentine President Carlos Menem.
While the Treaty establishing Yacyreta was signed by the two countries in 1973, construction did not get underway until 1983, when the estimated cost of the project was $1.35 billion. Since its inception, Yacyreta has been fraught with corruption scandals, gross mismanagement, construction delays, and cost overruns amounting to billions of dollars. The dam has been a financial black hole. Both the World Bank and the Inter-American Development Bank have loaned over $1.7 billion to the government of Argentina. Initial loans covered construction of the main civil works, including the powerhouse, earth dam, navigation, locks, irrigation intake, migratory fish elevators and purchase of turbines. As of 1991, however, construction was about 9 years behind schedule and had come to a standstill because the Argentine government owed some $300 million to contractors. The estimated cost of the dam had risen to about $8 billion. In order to finish the dam, the Argentine government requested new loans from the World Bank and Inter-American Development Bank.
By that time, both Banks had adopted strong environmental and resettlement policies, largely as a result of international NGO campaigns that exposed the enormous ecological and social disruption caused by large-scale infrastructure projects — like hydroelectric dams — that were financed by taxpayer dollars through the World Bank and other MDBs. As the World Bank and IDB prepared new loans for Yacyreta during 1991, their policies for the first time required the borrower to prepare an Environmental Impact Assessment (EA) and a Resettlement Plan. Moreover, the policies also required that affected citizens be consulted in the development of the project, and in order to have informed participation, new Bank policies gave citizens the right to have access to relevant information about the project prior to the loans’ approval. In this case, since the dam was 85% complete, consultation was to be part of the preparation of the two documents and implementation of the programs, rather than on the pros and cons of the entire project.
By 1992, when the World Bank and IDB loans were being negotiated, construction of the engineering works was 85% complete, while the "complementary works" — including housing for displaced people, parks, schools, sewage treatment facilities and other environmental mitigation measures — were only 15% complete. The EA, which was carried out on a project already nearing completion, nevertheless identified a number of critical environmental and social impacts that would need to be mitigated in order for Argentina to receive the Bank loans. Some of the impacts identified included:
- flooding of over 80,000 hectares of land in Paraguay and 29,000 in Argentina, including 30,000 hectares of forest, large and small islands, marshes and grasslands. Ninety eight percent of the land to be flooded was classified as wildland — natural ecosystems which are biologically unique;
- irreversible disruption of fish biodiversity and fishery resources upon which a sizeable population depend;
- involuntary resettlement of over 50,000 mostly urban poor people in the two countries, and indigenous Mbya peoples and peasant fisherpeople who had already been relocated far from the river to marginal lands in Paraguay;
- increased health risks from schistosomiasis, malaria and other diseases;
- severe pollution of the urban waterfront areas and the reservoir generally from untreated sewage, industrial and agricultural wastes.
The Bank loans were predicated on a three-stage plan in order to install turbines and begin electricity generation while conducting the environment and resettlement activities in phases. The reservoir would be filled to 76, 78 and then 83 meters above sea level (masl) over a period of several years. The loan requirements also included a plan that was to ensure implementation and financing of the remainder of the resettlement activities as well as recurring costs of environmental monitoring and mitigation. Bank loans were to cover a part of the estimated $650 million in environmental and resettlement costs; the remainder was to be supplied by counterpart funds from Argentina and the future sale of electricity.
During 1992 and 1993, NGOs in the region and internationally opposed the two loans on the grounds that the environmental assessment was inadequate, and that both the environmental mitigation and resettlement plans were dependent on an improbable financing arrangement. Chief among the complaints were a lack of baseline data to determine the extent of the biodiversity losses and impacts; inadequate identification of "compensatory reserves" — areas that were supposed to compensate the countries for flooded wildlands; absence of a plan to maintain minimum water flow in a principal branch of the river, the Aña Cua; and an underestimate of the number of people who had the right to compensation and resettlement.
At the time, the cost to date of the project was estimated at between $4 and $7 billion and questions were raised by NGOs and the US Government about the precarious economics of the project, and in particular what appeared to be grossly inadequate financing and unrealistic income projections. Critics said that the Bank had not fully justified energy demand in Argentina, and thus the economic rate of return was calculated on faulty assumptions about the future sale of electricity.
An international NGO campaign aimed at lobbying Executive Directors at both Banks to oppose the loan did not succeed, but did compel the World Bank (largely at the urging of the then U.S. Director, Patrick Coady) to include in the loan agreement stronger conditionality, more money for environment and resettlement activities, and promises for rigorous Bank supervision of the project. The IDB also increased the amount of its loan to $130 million and targeted it for environment and resettlement activities above 76 masl. A specific condition, that would be crucial to the future World Bank Inspection Panel claim, was that before EBY could raise the level of the reservoir to 76 masl, the required environmental mitigation and resettlement measures were to be completed to the satisfaction of the Bank.
Over the next few years, construction of the dam continued though the project persisted in operating behind schedule. Particularly lagging were resettlement and environmental mitigation activities. However, with two turbines installed, EBY decided to close the spillways in 1994 and to begin generating electricity. Neither the World Bank nor the IDB objected to the decision, even though the required environmental and resettlement actions had not been taken. These included resettlement and compensation for loss of means of livelihood of hundreds of families in urban and rural communities, completion of crucial hydrogeologic studies and the effective establishment of compensatory reserves, among other actions. The decision to close the spillways and create the reservoir at its first stage of 76 masl blatantly violated the loan agreement. Bank staff signed off on the proposal to fill the reservoir apparently based on an agreement that EBY would in fact complete all requirements by 1995.
This promise was eclipsed by the 1995 peso devaluation in Mexico which was followed by a macroeconomic crisis in Argentina. Referred to as the "tequila effect", the financial crisis caused reductions in public spending, including a complete cut-off of the government’s counterpart funding commitment to Yacyreta. NGOs had originally objected to the dependency on Argentine counterpart funding for environmental mitigation and resettlement activities because there was a fear that the promised resources would not materialize. In 1995, that fear was confirmed by the Argentine government’s refusal to spend another dime on Yacyreta until the project was privatized. Meanwhile, the creation of the reservoir led to significant deterioration of the lives of thousands of affected people on both sides of the river.