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 Report on Multilateral Development Bank Projects that Support Extractive Industries


6/6/2005

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Introductory Note on 2005 Report by the Treasury Department on Multilateral Development Bank Projects that Support Extractive Industries : The attached report describes "for each international financial institution, the amount and type of assistance provided, by country, for the extraction and export of oil, gas, coal, timber, or other natural resource since September 30, 2004."  Treasury prepared this report pursuant to section 576 (c) (2) of the Foreign Operations, Export Financing and Related Programs Appropriations Act, 2005.  

The Bush Administration is firmly committed to the legislation's goals of promoting transparency and accountability both in and through the international financial institutions (the IFIs) and, in particular, the multilateral development banks' (MDBs) support for extractive industries projects.  Good governance objectives are a high priority in the Administration's policy discussions with the IFIs.  The Administration is promoting transparency and fiduciary objectives for extractive resources in all appropriate fora.  For example, Treasury has promoted these objectives in its negotiation of MDB replenishment agreements, its consideration of the Extractive Industries Review of the World Bank, the review of the International Finance Corporation's safeguard and disclosure policies, and the revisions of the energy policies of the Inter-American Development Bank and the European Bank for Reconstruction and Development.    

Treasury has engaged actively with potential MDB extractive industry projects to ensure that issues related to environmental and social safeguards and revenue management are adequately addressed and mitigated upstream.  Treasury also remains engaged on on-going MDB major extractive industry projects to ensure that weaknesses, such as unforeseen capacity challenges, are also addressed.  

These efforts are leading to tangible improvements.  In response to a comprehensive and independent review of its activities in extractive industries, the World Bank has committed to prepare a formal report on its role in extractive industries by the end of 2005.  Already, the World Bank has provided new guidance and training courses for its staff on involvement in projects related to extractive industries.  It has also provided guidance on integrating extractive industry issues into the institution's country strategy discussions.  Importantly, the World Bank is going beyond its current guidelines, and is asking contractors in relatively small extractive industry projects that it finances to make transparency commitments comparable to contractors in larger World Bank-financed extractive industry projects.  The Bank is working with countries that will prospectively face resource-extraction issues but do not do so today (e.g., Sao Tome and East Timor).   

The Administration is strongly committed to push for efforts such as these to be extended and for similar commitments to be undertaken by the other MDBs, consistent with those institutions' mandates.  The IMF, though it does not provide project finance, complements the work of the MDBs � including through publication of a guide on best practices in resource revenue management that will help countries track and monitor extractive industries' revenues.  

MDB Projects that Support Extractive Industries  

World Bank IDA: Nigeria � Sustainable Management of Mineral Resources Project, 12/14/2004 :  This $120 million investment, technical assistance/capacity-building project seeks to increase the efficiency and sustainability of mineral extraction.  The project's three main components aim to:

  • Increase productivity of artisanal and small-scale miners of precious, semi precious, industrial and construction minerals, while improving the environmental sustainability of their mining;

  • Strengthen governance and transparency in the administration of mining rights and activities, with an eye towards attracting private investment in the sector; and

  • Facilitate the restructuring of state-owned mining corporations.

Some but not all mineral production will be exported.  The U.S. Executive Director supported this project.  

EBRD:  Bulgaria -- Chelopech Mining AD; $10m in loan and guarantees, 12/14/2004 :  Chelopech holds the mining rights and operates the Chelopech copper/gold mine in Bulgaria.  Dundee Precious Metals Inc ("Dundee") owns 100 percent of the share capital of Chelopech.  The EBRD investment supports the environmental remediation, refurbishment, modernization and expansion of the mine and processing plant in Bulgaria, thereby supporting corporate restructuring, improved efficiency, improved environmental performance, and improved standards for business conduct.  Some copper and gold materials will be exported to Western markets.  The U.S. Executive Director supported this project.  

EBRD:  Russia � Arctic Sun; $40 million equity investment in a Russian gas company; 1/11/2005; and IFC:  $50 million loan and $40 million equity investment; 1/18/2005 :  OAO Novatek is Russia's largest "independent" gas producer, accounting for roughly 5 percent of total Russian domestic gas production.  The EBRD proposed to purchase common shares from existing shareholders in a total amount no more than $40 million.  The IFC is expected to take an equal stake at the same price.  These investments would support the planned acquisition of a blocking stake (25 percent + 1 share, valued at $1 billion) by TotalFinalElf (TFE), the world's third largest private oil producer.  The EBRD investment is intended to improve Novatek's corporate governance, business conduct, and environmental and social practices, as well as have a demonstration effect in support of independent gas producers in Russia.  Some of the gas will likely be exported.   USED/EBRD voted " no" because the investment lacks adequate additionality, transition impact, and environmental safeguards.  The USED/WB voted " no" because it lacked financial additionality, development impact, and environmental safeguards.  

MIGA:  Democratic Republic of Congo � Anvil Mining Congo SARL; $12 million MIGA guarantee; 9/20/2004 :  MIGA's Board approved a total of $12 million in guarantees for Anvil Mining NL (Anvil) of Australia and RMB International (Dublin) Limited (RMB) of Ireland for equity and loans to Anvil Mining Congo, SARL (AMC).  The $7 million equity investment by Anvil and $5 million loan by RMB will fund AMC's development of the Dikulushi copper-silver project in the Democratic Republic of Congo.  The Dikulushi copper and silver deposit is in the Katanga province in the southeast of the DRC.  This is MIGA's first exposure in the DRC, which completed MIGA membership requirements in 2003.  MIGA sees the project's development impact in the form of economic returns, AMC's community development program, the development of linkages with local suppliers, improved infrastructure, and increased employment.  AMC has committed to setting aside 10% of profits to benefit the local community.  MIGA has influenced the community development program, which will be managed by an international NGO (negotiations underway with World Vision).  MIGA will insure against the risk of transfer restriction, expropriation, war and civil disturbance, and breach of contract.  The USED/WB supported the guarantee.  Most of the minerals from the project would be exported.  

IFC:  Venezuela � Petrofalcon; $36 million IFC loans; 12/3/2004 :  The IFC Board approved an A-loan of up to $24 million and a C-loan of $12 million in Petrofalcon for the expansion of oil and gas production in the west of Venezuela.  The former will be split into two tranches of $14 million and $10 million, with the second tranche dependent upon Petrofalcon reaching satisfactory production levels.  The IFC argued that its involvement in this project will promote Venezuelan exploration and production companies (a government goal), will instill improved environmental and social management, support the company's community outreach, bring additional tax revenues to the government, and improve corporate governance.  T he USED/WB voted "no" on this program in accordance with directed vote legislation and the trafficking in persons determination for Venezuela.  Most of the oil and gas from this project will likely be exported.  

IFC:  Chile � Sociedad Inversora Forestal; $6.5 million equity investment; 12/7/2004 :  The IFC Board approved an equity investment of up to $6.5 million in Lignum Forestry Fund (LFF), to be managed by Sociedad Inversora Forestal S.A. (SIF).    The LFF will acquire 20,000 hectares of existing forest plantations under land-use right agreements with small and medium landowners; afforest 30,000 hectares of new forest plantations on dry, eroded ground under similar land-use right agreements; secure long-term administrative and off-take agreements with Chile's leading forestry companies; and introduce forest-based securitized financial instruments to the Chilean capital markets that will securitize the proceeds of the harvests from the 50,000 hectares of plantations.  Based on a pilot project, landowners are expected to increase their annual income by more than 100% and retain land that they would otherwise be forced to sell for income.  All project plantations will obtain independent certification for sustainable forest management from the Chilean national forestry certification scheme.  No natural forests can be converted to plantations under this scheme.  The LFF will not operate in areas where there are conflicting claims to land, especially by indigenous tribes.  Finally, SIF will reforest all eroded land at the end of the project before returning the land to landowners.  The USED/WB supported this project.  While no final destination for the harvested trees was specified, some may be exported.  

IFC:  Oman � MB Petroleum; up to $40 million in IFC loans; 12/27/2004 The IFC Board approved IFC A Loans of up to US$40 million in the aggregate, consisting of a first loan of US$15 million, and a second standby loan of up to US$25 million, to MB Petroleum.  MB Petroleum, a private Omani petroleum company, plans to use the money to finance development of an oilfield in Oman.  The Omani company is a 50/50 joint venture partner with a wholly-owned subsidiary of China National Petroleum Corporation (CNPC).  Treasury staff felt that this investment was not consistent with the IFC's stated policy on activity in Gulf Cooperation Council (GCC) countries, as it did not promote a diversification for an oil-dependent economy.  The USED/WB abstained in the Board.  It is anticipated that the oil produced would be exported.  

IFC:  Mexico � La Colorado/Pan American Silver Corporation of Canada; swap of "loan kicker" for stock options; 3/25/2005 The IFC Board approved in February 2001 a $28.6 million investment in a $50.8 million project for the La Colorada silver mine project in Mexico.  The mine is fully owned by Pan American Silver Corporation of Canada.  The potential B-loan participants' hedging requirements were too costly for Pan American, so the project was reduced in size, and the IFC went forward with a $10 million A-loan.  The A-loan included interest and a "Loan Kicker" which gave the IFC a bonus if silver prices went above $4.75/oz, whether or not the mine was profitable.  The loan was prepaid on May 15, 2004, five years ahead of schedule, but Pan American still has to pay IFC the loan kicker even though the mine is losing money.  The IFC negotiated an alternative whereby it will forego the Loan Kicker in exchange for five-year stock warrants in Pan American.  The IFC will have five years to decide whether to exercise the warrants and can look at the broader performance of Pan America, which includes more successful mines in Latin America.  The USED/WB supported the transaction after receiving assurances that Pan American was conducting a new environmental audit and that the company is open to complying with IFC/World Bank environmental and social guidelines.  It is anticipated that most of the silver from this mine would be exported.  

IFC:  Russia � Peter Hambro Mining; $15 million equity investment; 3/31/2005 :  The IFC is proposing to make an equity investment of $15 million equivalent in pounds sterling in Peter Hambro Mining Plc. (PHM), a Russian owned and managed gold mining company.  The investment will include an option to buy additional shares in PHM over the next eight years that could mean investing up to an additional $18.75 million.  At some point in the 12-18 months after Board approval, PHM may ask the IFC to participate in the financing of a $200 million expansion of the existing plant at Pokrovskiy.  The investment will help support PHM's exploration and appraisal activities.   The IFC argued that its unique role in this case is to facilitate eventual financing for future projects such as the expansion of Pokrovskiy and the development of the Pioneer site, assist PHM in maintaining good environmental and social practices, and to help improve corporate governance.  In the case of the latter, the IFC will help appoint a third independent director (currently two).  The USED/WB supported the transaction but noted that subsequent investment decisions on production presented to the Board would be held to a higher set of standards than exploration and appraisal activities.  If PHM decides to expand its existing plant or develop a new site, most of the production will probably be exported.  

IFC � Africa Region � Afren; $1.0 million equity investment; 4/8/2005 The IFC Board approved a ₤550,000 investment in Afren plc, a UK-registered company established to pursue the acquisition and development of oil and gas opportunities principally in Africa.  The company's plan is to acquire properties in production and near/under development, exploration opportunities and, over time, more sizeable assets.  The USED/WB abstained on the project because it felt that future activities by the company � namely, operating oil and gas fields in Africa � could have a significant environmental impact and would not receive the necessary public disclosure of environmental standards.  Most of the oil and gas from fields under Afren management or where Afren holds a stake will be exported.

IFC � Democratic Republic of Congo � Kingamyambo Musonoi Tailings SARL; $5.9 million equity investment; 5/12/2004 The IFC Board approved $5.9 million in equity investment and shareholder loans to acquire a 7.5% equity interest in Kingamyambo Musonoi Tailings SARL (KMT) to complete the "Definitive Feasibility Study, Environmental and Social Impact Assessment (`ESIA')" to structure a project that will produce 30,500 tons per annum of copper and another 5,4000 tpa of cobalt.  In Kolwezi, DRC, there are around 116 million tons of tailings left over from previous mining operations.  The primary owner of KMT, Adastra, believes that it can reprocess this waste in an economically feasible manner to reclaim copper equal to 1.5% of the tailings and cobalt that represents 0.3%.  If this can be done, it would turn this waste pit into the world's leading producer of cobalt and a mid-size producer of copper.  The USED/WB supported this investment because it is not subject to the Pelosi mandate, but if the IFC decides to help finance Phase 2, the actual production and operation of the reclamation project, Treasury would have to determine whether the project meets the 120-day disclosure requirement.  Most of the cobalt and copper from this mine would be exported.

Non-Extractive Industries Projects that Share Some Similarities with Extractive Industries Projects  

World Bank:  Ghana � West African Gas Pipeline; $75 million MIGA guarantee and $50 million IDA partial risk guarantee for Ghana; 11/30/2004 :  The World Bank approved IDA and MIGA guarantees to support construction of a 678 km pipeline to transport natural gas from Nigeria to three other West African nations:  Benin, Ghana and Togo.  The pipeline is expected to accelerate economic integration in West Africa and lower the cost of power in these countries.  The pipeline's operation will directly result in additional gas volumes being extracted in Nigeria. The project is about 55 percent privately owned and controlled, and the IDA partial risk and MIGA guarantees cover default by the Government of Ghana exclusively.  The U.S.ED supported the guarantees.  

World Bank and Asian Development Bank:  Laos � Nam Theun 2 Hydroelectric Project; 3/31/2005 (World Bank) and 4/4/2005 (ASDB):   This hydro-power project is not an extractive industry, and is mentioned because the Treasury Department had extensive discussions with the World Bank and Asian Development Bank on similar issues to those that arise on extractive industry projects:  transparency and allocation of govt. revenues and expenditures related to the project; and environmental and resettlement issues.  Treasury was successful in obtaining some important improvements in the project through its dialogue with the MDBs, including increased transparency of some of the audits and fiduciary analysis that will be undertaken, and additional environmental and social commitments by the Government of Laos.  The project involves construction of a dam to produce electricity for export to Thailand and for some domestic sales within Laos.  The project will generate substantial revenues for the Government of Laos from water usage charges, dividends and corporate taxes.  The World Bank Board approved a $20 million IDA grant to the Government of Laos, a $20 million IDA partial risk guarantee for a syndicated commercial loan, and a $200 million MIGA guarantee for a syndicated commercial loan to and an equity investment in Nam Theun 2 Power Company Ltd.  The AsDB Board approved a $50 million loan and a $50 million political risk guarantee to the Nam Theun 2 Power Company Ltd.  The U.S. Executive Directors "abstained" on policy grounds and because some of the environmental analysis was not publicly disclosed 120 days prior to Board consideration as required by the Pelosi legislation.  The policy rationale for the abstention was our concerns on 1.) risks related to environmental and social issues, 2.) Lao PDR's macroeconomic environment, and 3.) project conditionality.  

EBRD:  Serbia & Montenegro � Sevojno Copper Rolling Mill; �16 million loan to upgrade the production facilities of a copper mill in Serbia; 5/4/2005 :  The EBRD proposed a �16 million loan to finance capital investments in Sevojno Copper Rolling Mill (the "Company"), a producer and exporter of copper semi-finished products.  The investments would enable the Company to upgrade production facilities to improve operational efficiency and product quality to secure long term competitiveness of sales.  The Company imports raw materials and does not extract them.  The EBRD's client, East Point Holdings Limited of Cyprus, owns 35% of Sevojno Copper Rolling Mill, a joint stock company incorporated in Serbia and Montenegro.  The U.S. Executive Director voted "no" because the provisions in the Lautenberg legislation relating to war criminals in Serbia have not been met.

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