IFIs in Africa News Briefing

Issue #34

Tuesday, September 08, 2009

In this issue:


IFC to collaborate with China in Africa's oil industry

Reuters reports that the International Finance Corporation (IFC) is planning closer cooperation with China to fund increased spending in Sub-Saharan Africa's growing oil and gas industry. IFC sees great potential in the continent as it is fast becoming an important source of oil and gas and is attracting interest from Europe, Russia and Asia.

Africa is a focus region for IFC - 20 percent of the institution's $2 billion global oil and gas portfolio is in Sub-Saharan Africa - with the institution eyeing significant future investment opportunities in Uganda and Tanzania. According to Kamal Dorabawila, IFC's top investment official for the oil and gas sector in Africa, China is a valuable partner to IFC because of the country's willingness to take on the risks associated with investing in Africa. China has invested billions of dollars in Africa, surpassing many western countries as its major investor.

At the same time, this amounts to yet another pronouncement on the World Bank Group's intentions to collaborate with China. In June 2007, IFC and China's export credit agency China Exim signed a high-profile agreement to co-finance investments in Africa, which was seen by many as a move by IFC to avoid competition with its Chinese counterparts. Despite the much-touted announcements, however, it remains unclear whether any joint operations have gone forward.

The questionable track records of both IFC and China regarding the impacts of their investments on people and the environment raises many concerns about their partnership. Civil society groups are skeptical that either is in a position to ensure the environmental and social sustainability of their investments.

IFC, which ironically considers itself the leader in sustainable banking, has failed to ensure the environmental and social sustainability of its own projects. In February 2009, IFC approved $215 million in loans to Kosmos Energy and Tullow Oil for the exploitation of oil and gas reserves in Ghana's Jubilee field, despite objections from civil society groups who requested that consideration be delayed until major environmental and governance issues were addressed. Among the outstanding environmental concerns are the lack of an environmental and social impact assessment, plans to dump drilling waste into the sea, and inadequate assessments of the potential impacts of an oil spill; the chances of which are exacerbated by the use of antiquated equipment.

 

 AfDB doubles lending in response to financial crisis

According to Reuters, the African Development Bank (AfDB) is expected to double its investments this year with commitments amounting to some $11 billion - up from $5.8 billion the previous year - in response to the global financial crisis. According to AfDB President Donald Kaberuka the investments are going towards budget support operations, infrastructure projects, liquidity programs and a $1 billion trade finance facility.

At its Annual Meetings this past May, AfDB Board of Governors passed a resolution to initiate plans to triple the Bank's general capital to nearly $100 billion so that it would have sufficient resources to allow it to cope with the global financial crisis. The AfDB will convene a meeting of its shareholders at the end of next week to review the adequacy of its capital, which it uses to make loans through its non-concessional lending window for middle income African countries and the private sector.

Meanwhile, the Bank is considering the possibility of an early replenishment to its concessional lending window, the African Development Fund (ADF), which is funded primarily by donor country contributions. Donor countries will meet in Helsinki in October to discuss options to increase resources for the ADF, which offers loans and grants to poor countries. Some advocates argue that resources would be better spent if targeted to poor countries through the ADF replenishment, as opposed to a capital increase.

The proposed capital increase and ADF replenishment are expected to improve the Bank's lending and financing capability and allow it to play a more important role in helping regional member countries cope with the financial crisis. This would be crucial for the AfDB to sustain its current lending levels, as it has nearly exhausted its resources and would otherwise have little to lend in 2010. The financial crisis has had a greater impact on the continent than earlier feared. As a result, African countries and many projects which have had their original financiers pull out due to the crisis, are looking to the AfDB to get much needed financing and mitigate the effects of the crisis.

Given AfDB's questionable investments in problematic projects like the Gilgel Gibe III hydroelectric project in Ethiopia, however, it remains unclear whether AfDB has demonstrated proper judgment in project selection and that its investments are geared toward poverty reduction. The AfDB is expected to consider around $250 million in project financing despite massive social, environmental and economic risks associated with the dam, which have yet to be addressed.  Construction of the Gibe Dam started in 2006 despite the lack of an environmental and social impact assessment.

Friends of Lake Turkana (FoLT), a Kenyan organization representing indigenous groups in northwestern Kenya, filed a complaint with the AfDB's Compliance Review & Mediation Unit (CRMU) in February 2009 to investigate and intervene in the Bank's plans to finance the Gibe project and its impacts on Lake Turkana and the ecosystems and people who depend on it.

The Gibe Dam is also expected to have significant impacts on local communities in Ethiopia, yet affected peoples and civil society have had to suppress their concerns in fear of government retaliation. Recognizing the lack of freedom allowed to Ethiopian citizens, the CRMU recently agreed to register a complaint filed by five international organizations concerned about the project's impacts on populations and the environment in Ethiopia.

The Gibe project has also raised controversy when the Ethiopian government failed to follow standard procedure when it awarded the main contract to Italian firm, Salini, without a bidding procedure. Many potential public funders turned away from financing the project because of this flaw and private financiers like J.P. Morgan Chase withdrew support due to the financial crisis. Despite its procurement guidelines prohibiting it from funding the main contract, the AfDB evaded the rules by taking advantage of a loophole in the loan under consideration which allowed it to finance through a sub-contract.

Meanwhile, the World Bank, which originally refused to fund the contentious Gibe Dam because it violates the Bank's procurement policy, is now considering providing financial support for the project at the request of the Ethiopian government. The World Bank has stated that it is considering supporting the project through a guarantee, which whould be exempt from having to abide by the procurement policy and international norms. However, the Bank's website indicates that it is actually considering financing the dam through a conventional loan, though it is unclear how the Bank would justify such a blatant about-face.


DRC cancels contract in IFC-backed mining project

 At the beginning of August, the government of the Democratic Republic of Congo (DRC) announced that it terminated its copper and cobalt mining contract with First Quantum for the IFC-backed Kingamyambo Musonoi Tailings (KMT) project, following a review of 61 mining contracts. The review was launched in 2007 by the Congolese government in efforts to boost the country's revenues from the mining sector and bring contracts in line with international minimum standards. The government cited issues such as non-payment of royalties and failure to adhere to an agreed timetable as reasons for the cancellation. Meanwhile, the government has indicated that it is willing to consider renegotiating the agreement with First Quantum.

At the time of cancellation, the project was in the development stage and 65 percent complete. The $600 million project entails processing the tailings of previous mining activities. KMT would produce 70,000 tons of copper and 14,000 tons of cobalt at full production.

The International Finance Corporation (IFC), which has a 7.5 percent stake in the project, financed pre-feasability studies in 2005 - which were carried out at the time by the Canadian company Adastra before the project was taken over by First Quantum. The IFC classified the project as environmental category "B", meaning its environmental and social impacts will be limited, site specific, and reversable, despite concerns to the contrary. The IFC is currently considering financing the production stage of the project as well to the tune of $60 million.

According to Bloomberg, the IFC is taking advantage of the financial crisis to make more investments in the mining sector, particularly in Africa, and is considering financing 15 mining projects for the next year.

DRC's once lucrative mining sector, which benefitted from the commodities boom earlier in recent years, has been hit hard by dramatic falls in metals prices. Most of the 61 mining contracts under review were signed during the 1998 - 2003 civil war; a period plagued by corruption. The DRC is now looking to renegotiate the 61 mining contracts in order to increase its share of revenues from the industry.

Some observers have criticized the World Bank's involvement in the DRC's mining industry, questioning its emphasis on the privatization of the country's mineral resources as a driver of economic growth, as well as the Bank's apparent reluctance to use its leverage to help the DRC gain a fair share for its resources by supporting the contract renegotiation process.

World Bank pledges support for DRC's Grand Inga dam

During his recent visit to the Democratic Republic of Congo (DRC), World Bank President Robert Zoellick expressed the Bank’s support to help finance the Grand Inga hydropower project through guarantees or partnerships with the private sector. The Grand Inga dam project - estimated to cost $80 billion - is being touted by proponents for its potential to bring electricity to millions of Africans and jumpstart industrial development on the continent. Observers, however, are skeptical that the proposed project presents a solution to Africa’s energy problems and whether the millions of Africans without access to electricity would stand to benefit.

Located in western DRC, the Inga site is said to hold 40,000 to 45,000 MW of the country’s 100,000 MW of hydropower potential. It currently comprises two power plants, Inga 1 and Inga 2, with a capacity of 1,800 MW each. The Congolese government is looking to capitalize on Inga’s potential with the construction of Inga 3 and Grand Inga. According to Reuters, the government is seeking about $2.5 billion to rehabilitate existing infrastructure, $3 billion to increase production, and $22 billion to develop Inga 3, and ultimately to fund Grand Inga.

The World Bank is currently providing about $300 million through the Regional and Domestic Power Markets Development Project (PMEDE) to finance the rehabilitation of Inga 1 and 2 hydroelectric power plants in the hopes to increase reliability and operational capacity from the present level of 700 MW to almost 1,300 MW. Plans for Inga 3, meanwhile, have become muddled as DRC has apparently reneged on its agreement to export power to Southern Africa, and instead has promised its output to power BHP Billiton’s planned aluminum smelter in the mineral-rich country.

Feasibility studies suggest the 40,000 MW Grand Inga dam, which would dwarf the output of China’s Three Gorges Dam,  will be 150 meters high and will harness 26,000 cubic meters of water per second, with more than 50 turbines each producing as much power as a British nuclear reactor. Proponents of the Grand Inga project are claiming it will supply electricity to 500 million of Africa’s 900 million people, but according to International Rivers, the project's electricity won't reach even a fraction of the continent's 500 million people not yet connected to the grid.

The 94 percent of people in the DRC who do not have electricity are unlikely to benefit from the dam, states Terri Hathaway, International River’s Africa campaigner. This is because Grand Inga’s financial support depends on exporting its electricity to existing mining, industrialized and urban centers in Egypt, South Africa, Nigeria even as far away as Europe. According to the Guardian, the Grand Inga project would supply power to southern Europe, at a time when less than 30 percent of Africans have access to electricity - a figure that can fall to less than 10 percent in many African nations.

Environmental and advocacy groups warn that Grand Inga could bypass those who need it most and ignore the local people by leaving them in the dark about project plans. In April 2008, the World Energy Council, which organized a conference for financiers and African politicians in London to discuss plans of how to finance the $80 billion Grand Inga Project, failed to invite Congolese civil society and communities living around the dam area, leaving no voice to defend their interests.

8000 plus villagers face the possibility of displacement, despite claims by the WEC that the Grand Inga project will require no resettlement. Villagers living near the dam site are left to wonder how they will be impacted by the potential project and whether their rights will be protected. Social and environmental impacts with Inga 1 and 2 still remain unresolved, with, among other issues, displaced communities yet to be compensated for their resettlement. The good management of any further development at Inga would be impossible without the resolution of long standing issues with the local communities.

Note: The text of the IFIs in Africa News Briefing may be freely used providing the source is credited.

The Bank Information Center (BIC) partners with civil society in developing and transition countries to influence the World Bank and other international financial institutions (IFIs) to promote social and economic justice and ecological sustainability. BIC is an independent, non-profit, non-governmental organization that advocates for the protection of rights, participation, transparency, and public accountability in the governance and operations of the World Bank, regional development banks, and IMF.

BIC is supported by private foundations and organizations that work in the fields of environment and development. BIC is not affiliated with any of the Multilateral Development Banks, nor does it receive any funding from them.


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