February 2002

Context/impetus for the Extractive Industries Review

·            Under a business as usual scenario, oil, gas and mining activity and demand is likely to grow over next few decades

o        What are the alternatives to this scenario?

·            There has been a shift in exploration and development to developing countries and countries in transition

·            Within these countries, the focus is on remote areas that are often home to isolated indigenous communities and fragile ecosystems

·            Many major new reserves overlap with undeveloped, critical ecological and cultural zones, partially because they’re undeveloped and thus largely unexplored

·            It is assumed that these developing countries and countries in transition need to and want to exploit their resources to promote development

o        Do they?  What are the alternatives?

·            A growing group of international organizations is calling for the World Bank Group to completely divest itself of extractive industries projects.

Ø      Basic question to be answered by the Extractive Industries Review:

Should the World Bank Group (WBG) invest in the extractive industries, namely oil, gas and mining projects?

Ø      In order to answer this question, the review must address a fundamental issue:

Can extractive industries projects be compatible with the WBG’s goals of sustainable development and poverty reduction?

What is sustainable development?

·            Brundtland Commission:  Sustainable development is development that meets the needs of the present, without compromising the ability of future generations to meet their own needs.

·            What is Sustainability?

o        While much of society agrees that sustainability is a desirable end, there is less agreement on what sustainability actually is or should be.  

o        Three potential components of sustainability:

·            Economic – avoid the “yoyo effect” that hurts the poorest most

·            Social – avoid marginalizing communities or destroying their spirit and culture

·            Environmental – ensure that there is an option for future generations after a non-renewable resource is depleted

What is required for poverty reduction?

·            Economic development.  Wealth generated from resource extraction must be converted to human, physical and social capital to promote broad national economic development and poverty reduction

Ø      Although oil, gas and minerals, as non-renewable resources, are inherently unsustainable, can they be exploited in such a manner as to promote a net environmental, social and economic benefit and leave viable options for future generations?

It has been argued that, in all but a few cases, resource-richness and dependence on the extractive industries HAVE NOT made a positive contribution to economic growth.[2] 

·            On the contrary, growth is slower in many resource-rich countries.  Extractive industries not only do not reduce poverty, they appear to make it worse.

·            Oxfam report:  Oil and mineral dependence is strongly linked to very bad conditions for the poor, high poverty rates and low standards of living.  Mineral dependence is strongly linked to poverty and income inequality, while oil/gas dependence is strongly linked to child mortality, malnutrition, low education and literacy rates and low spending on health care.

·            Dependence on extractive industries also often translates into lost opportunities for development of a country’s agriculture and manufacturing sectors.

Ø      Given these statistics, a key question becomes:

Is it possible to translate resource wealth into sustainable development and strong poverty reduction in resource-rich countries?

Determining the answer to this question requires understanding the key reasons that extractive industries do not make a positive contribution to sustainable development and poverty reduction – i.e. the major negative impacts of these activities.

·            It is important to clearly differentiate amongst the three industries

·            Issues should be considered throughout the entire project cycle – from initial planning through to closure.

Potential negative environmental impacts and costs

·            During exploration:

o        Noise from aircraft, helicopters and explosions can disturb wildlife.

o        Cutting of seismic lines can fragment habitats.

o        Deforestation and land-clearing can lead to erosion and sedimentation.

o        The presence of a large number of workers can result in hunting and collecting of local wildlife and resources such as fuelwood.

·            Land-clearing and habitat loss

o        In forested areas, clearing of land for facilities and infrastructure can lead to erosion and sedimentation.

o        The loss of highly productive topsoil threatens the potential for regeneration in an area.

o        Loss of key biodiversity resources

o        Land-clearing can disrupt watersheds and change hydrology.

o        The biggest footprint is from open pit mining.

·            Access roads and pipeline paths

o        One of the biggest environmental issues surrounding large-scale development in remote, undeveloped areas is that the building of access roads or the opening of paths for pipelines provides new access to previously inaccessible areas.

o        Settlers, small-scale miners, hunters and small-scale loggers may move into an area along these new access routes and cause environmental harm.

o        Agricultural colonization along these routes starts a cycle in some areas (for example rainforests), where infertile soils that wear out after a year or two force settlers to abandon their cleared land and move even further into the undeveloped area.

·            Waste

o        Inappropriate disposal of waste material can contaminate water, soil & air.

o        Waste pits can overflow or leach into groundwater.

o        Flaring and burning of excess gas can cause air pollution and generate greenhouse gases, contributing to global warming.

o        Chemical contamination can also result from the materials used during mining – for example mercury, cyanide and sulfuric acid.

o        The big waste issues in mining are tailings and acid rock drainage

§         Tailings consist of finely ground particles (including ore, process reagents and chemical residues) suspended in water.  In the worst cases, this waste is dumped directly into surface waterways, contaminating the surrounding water and soil, harming neighboring vegetation and agriculture.  Ideally, tailings should be stored and treated behind dams in tailings impoundments, but even these are not always foolproof, as dams may burst if not properly designed and constructed. 

§         Acid rock drainage results from sulfide minerals, which are components of many metals, oxidizing into sulfuric acid when they are exposed to air during the mining process.  Acid rock drainage can come from waste dumps, tailings impoundments or mines themselves.  The acid drainage can contaminate soils and water, making it very acidic and killing animals and vegetation.  ARD is often indicated by orange water in streams and lakes near a mine.

·            Increased use of resources

o        Resource extraction, particularly mining, requires the use of large amounts of water, which can threaten local water supplies or lower the water table.

o        Increased energy requirements can tax existing supplies.

Potential negative social impacts and costs

·            The key social change with large-scale resource extraction is the influx of outside people, bringing with them new ideas, cultures, values and technologies.

o        Traditional production systems and social structures can be disrupted.

·            Impacts on indigenous people

o        In extreme cases, a new project in an undeveloped area can lead to contact with previously isolated people who have little or no experience with the outside world.  This contact can lead to social disruption, sickness and death from exposure to illnesses to which they have no immunity.

·            Physical displacement

o        People may be physically displaced by an extractive industries project, through loss of land tenure or forced or voluntary relocation.

o        Communities with unrecognized land-rights, no legal title to their land or where the government owns the rights to subsurface minerals, may lose some of their traditional lands to a project.

o        Formal relocation may cause problems if the new location is inappropriate and has less or no resources or positive attributes.

o        Land-clearing and facility construction may lead to disturbance of archaeological and cultural sites

·            Health effects

o        Communities may be severely impacted by exposure to new illnesses to which they have no resistance, even the common cold.

o        Air, water and soil pollution can cause human health problems and threaten agriculture and food supplies.

o        Chemical contamination from large- and small-scale mining (lead, cyanide, mercury) can cause other adverse health effects.

·            Demographic shifts

o        Both population losses and increases can be damaging to a community.

o        With population loss may come loss of traditional knowledge and practices and loss of manpower for traditional production systems.

o        With population increases and influx of outside workers and others seeking benefits from a project can come competition for resources, crowding, inflation of local prices and widening income disparities.

o        The presence of a large number of single male workers can lead to problems of prostitution, violence, alcohol abuse and the spread of sexually transmitted diseases such as AIDS.

·            Excessive dependence on outside aid

o        While a resource extraction project can bring important benefits, including employment, infrastructure and social services, if this development is not introduced in a sustainable manner it may lead to over-dependence on outside aid and cause problems when the project ends.

o        The introduction of a cash economy can lead to the abandonment of traditional forms of livelihood and productivity.

o        The development of enclave projects that don’t provide a foundation for development in the wider community can cause problems after closure.

·            Specific impacts on women

o        Women are often not included in consultation and decision-making, so their concerns (often related to health and child welfare) are not heard.

o        Because women are often responsible for the welfare of the family, they may feel the burden of adverse health impacts more

o        If men leave home to work on a project, women are left behind to deal with the home and the traditional production systems, such as agriculture

o        The introduction of alcohol and prostitution in some cases can lead to increased violence against women.

·            Human rights abuses

Potential negative economic impacts and costs

·            Key issue is revenue management and distribution.

o        Most critical determinant of whether society will benefit is who controls the revenues and who decides how impacts will be borne, not just richness in resources or whether they’re exploited

o        Which share goes to communities vs. governments (local/national) vs. shareholders – does intended distribution really happen?

o        What are revenues spent on and who decides how they are spent?

o        Who gets benefits/who bears costs?  How to weigh one vs. the other? Local vs. national.

·            Extractive industries are capital intensive and require little unskilled or semi-skilled labor.  They may create pockets of wealth for a few, while environmental and social problems generally affect the poor, who are very vulnerable to boom and bust cycles.

Governance issues

·            It has been shown that governments in resource-rich countries are more likely to be corrupt, authoritarian and generally ineffective, failing to follow through on promises of benefits to society.

·            Revenues from resource extraction are either plowed back into resource development or used for military spending, rather than reduction of poverty.

·            Competition for control of revenues and resources often exacerbates local instability and conflicts, leading to civil war.

Ø      Following a broader discussion of these questions at a global level, each regional consultative workshop should look at the issues and concerns specific to its region:

What have been the major positive and negative contributions of extractive industries to your region, country and communities?  What have been the environmental, social and economic costs and benefits?

A key question in this analysis is how should local benefits and costs be weighed against national and international benefits and costs?

Environmental

·            How has the environment been affected by oil, gas and mining projects?

o        What have been the local, regional and global impacts?

·            Has there been major environmental degradation?

·            Who has borne the bulk of the costs?

·            Have best available technologies been used, along with best practices for management and implementation?

·            Have the industries made positive contributions to conservation?

·            What are the key conservation resources in your region and how are they, or might they be, affected by extractive industries?

Social

·            How have local communities and lives been affected by oil, gas and mining projects?

·            Have there been major negative social impacts?

o        Specific positive or negative impacts on indigenous communities?

o        Increased family instability, alcoholism, disease or violence?

o        Have there been specific health effects from the in-migration of workers?

·            Has there been significant improvement of standards of living/social services through community development programs?

o        Specifically, have there been improvements or decreases in health care, nutrition and education of children?

o        Have traditional activities (i.e. of indigenous communities) suffered or stopped because of assistance?  Is this good or bad? 

o        Have promised social benefits been realized?

·            Are costs and benefits shared equitably or do some bear costs while others gain benefits?

o        Who bears the most costs?  Who gets the most benefits?

·            Have communities been consulted before projects went ahead?

o        Was this consultation open and transparent?

o        Do communities have access to complete, correct and reliable information throughout the project life?

o        Do communities have the capacity and the resources to participate fully in the consultation?

o        Can communities impact decision-making?

o        Do communities have a right to free, prior and informed consent?

·            Have affected communities been compensated for damages?  Fairly?

o        Do benefits go beyond compensation for harms?

·            Have people been able to raise concerns (with WBG/government/industry)? What was the result?

·            How have human rights been impacted by oil, gas and mining in the region?

o        Do WBG resource extraction projects uphold the UN-Declaration on Human Rights?

o        Do extractive industries projects (WBG and other) pose greater risks of human rights abuses than projects in other sectors?

·            Are there sufficiently high health standards for workers and communities, safety standards, and contingency plans for spills and accidents?

·            What is the state of small-scale mining in this region?

o        What is its relationship to large-scale mining?

o        Has the WBG played a role in small-scale mining?

Economic

·            How have local, national and regional economies been affected by oil, gas and mining projects?

o        Has there been local inflation?

·            Have environmental and social and been factored into project accounting?

·            Have the projects created jobs for local workers?

o        Have there been increases in local wages and skill levels, transfers of technology and knowledge?

o        Have any long-term employment opportunities or small businesses been created that will last beyond the project?

o        Do the projects use local inputs and services?

·            Have promised economic benefits been realized?

o        Do these projects serve local energy needs or create resources for export?

·            Where are revenues being spent or invested?

·            Are any revenues flowing to local recipients?

·            Do you think the potential revenue of further development of these sectors outweighs the potential negative environmental and social impacts?

Governance

·            Is there sufficient management and institutional capacity at local, regional and national government levels?

o        Is capacity building and institutional strengthening needed?

·            Are the necessary policies and incentives in place to promote good performance?

·            Is there government corruption in management of these industries? Where?

·            Is there democratic governance in the region/country/area?

·            Has armed conflict resulted from the presence or exploitation of natural resources?

o        How can this be avoided in the future?

o        Have conflict resolution mechanisms worked in past?

WBG role

·            What have been the specific problems with WBG-financed oil, gas and mining projects in your region?

o        What could have been done differently?

·            How effective has past WBG involvement in oil, gas and mining been? 

o        Did any projects result in a net social or environmental benefit? How?

o        Why did some projects succeed while others failed?

·            What would be the consequences of WBG withdrawal from the Extractive Industries for any given area?

·            What are the specific priorities for sustainable development in this region?

·            What can the WBG do to improve the sustainability of the extractive industries sector in this region?

Ø      Given these existing and past problems:

What, if anything, can be done to increase the contribution of extractive industries to sustainable development and poverty reduction, and what is the World Bank’s role in this? 

It is important to consider whether there are better ways to balance the trade-off between benefits and risks? How do you weigh the negative vs. positive impacts, local vs. global, revenue vs. social disruption?

Basic sustainability measures

·            Environmental and Social Impact Assessments (EIAs and SIAs)

o        Complete before major activity begins, allowing sufficient time for data collection, analysis, consultation, comment, review and approval.

o        Focus on the ecosystem or regional level, rather than just the direct footprint of operations.

o        Do assessments for all activities, including exploration, and new or partial assessments for major changes or additions.

o        Review the nature and scope of potential impacts, present a series of alternatives (including not proceeding) and recommend a course of action.

o        Allow impartial third parties to monitor compliance with management plans.

·            Long-range strategic land-use planning

o        Develop a land-use plan through a consultative process involving all relevant stakeholders to determine priority areas for environmental and cultural resources and economic development.

o        Such a plan can highlight areas where conflict might arise.

·            Capacity-building

o        Increase government capacity through training in both technical skills and implementation and enforcement of laws.

o        Clarify roles of various agencies involved in overseeing extraction.

o        Promote effective communication among different actors.

o        Provide capacity-building at the individual and community level, to ensure that community members acquire skills for long-term sustainable economic activities.

·            Personnel

o        Train all employees, including contractors, in environmental and social policies and guidelines and enforce penalties for noncompliance.

o        Include environmental and social experts throughout the process.

o        Forbid hunting or collection of local wildlife or resources.

·            Legislation

o        Enact clear, transparent and equitable laws and regulations, both sector specific and general environmental and social laws.

·            Monitoring and evaluation

o        Regularly monitor the direct footprint of the operation as well as its larger impact on the ecosystem and surrounding communities as a whole.

o        Base monitoring on baseline data that may need to be collected if it doesn’t already exist.

o        An M&E system measures success, prevents mistakes and allows for necessary changes throughout the operation.

·            Financial tools and incentives

o        Taxes and fines can provide negative incentives for good performance, pollution control and waste reduction.

o        The posting of performance bonds can help to ensure that funds are available for mitigation and reclamation of any potential damage and provide positive incentives for damage avoidance.

o        Trust funds can provide additional funding for environmental and social programs, provided all proceeds go to intended beneficiaries.

·            Closure plans

o        Develop plans for closure, including environmental reclamation and long-term community welfare before the activity begins.