October 9, 2007
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Report on Multilateral Development Bank Projects that Support Extractive Industries

Introductory Note on 2007 Report by the Treasury Department on Multilateral Development Bank Projects that Support Extractive Industries: The attached report describes the amount and type of assistance provided by each international financial institution, from April 2006 to April 2007, for the extraction and export of oil, gas, coal, timber, or other natural resources.  This report follows-up on reports previously submitted by the Department of the Treasury pursuant to certain reporting mandates contained in the FY 05 and 06 foreign operations appropriations acts.

IFI Assistance to Support Extractive Industries

Introduction

This Administration remains committed to the important goal of promoting transparency and accountability in and through the IFIs including with respect to multilateral development bank (MDB) engagement in extractive industries projects.  Treasury takes the position that government revenues derived from extractive industries should be reported accurately and transparently and be used to meet the development needs of the host country.

Through its Executive Directors, the United States has advised the managements of the IFIs that it is U.S. policy that assistance to a country for the extraction and export of natural resources should not be provided unless the country has or is taking the necessary steps to put in place functioning systems for accountability and reporting.  We stress the importance of resource revenue transparency in Board consideration of MDB projects, country and sector strategies, IMF Article IV consultations, Poverty Reduction Strategy Papers (PRSPs), and diagnostic studies, and in bilateral meetings with country counterparts. 

Resource revenue transparency is an important standard that we use in our analysis of MDB project proposals.  Treasury interventions on MDB loan proposals have led to greater transparency and accountability of subsequent proposals.  Also, we promote resource revenue transparency when considering proposed MDB policies such as the forthcoming Inter-American Development Bank and Asian Development Bank energy policies, and when overseeing their implementation in individual hydrocarbon and mining sector operations.

We have also encouraged the IFIs to make fiscal transparency a central part of their diagnostics, including through application of the newly updated IMF Guide on Resource Revenue Transparency; revised IMF Code and Manual of Good Practices on Fiscal Transparency; IMF Code of Good Practices on Transparency in Monetary and Financial Policies:  Declaration of Principles; World Bank Country Financial Accountability Assessments; and the joint Public Expenditure and Financial Accountability (PEFA) indicators. 

The United States has been active in the Extractive Industries Transparency Initiative (EITI), and sits on the EITI's newly established Board of Directors.  Partly in response to Treasury encouragement, the Government of Liberia has announced its commitment to the EITI process.  Recently, a senior Treasury staff member visited Baku to discuss Azerbaijan's implementation of EITI with government officials and members of the local EITI multi-stakeholder organization. 

Our efforts to promote transparency and accountability extend beyond the extractive industries sector.  Following strong U.S. leadership during negotiation of the fourteenth replenishment of the International Development Association (IDA), the World Bank agreed to predicate IDA's financial assistance for extractive industries projects with a significant impact on revenues upon the recipient government's having in place, or committing to establish, a functioning system for accounting for revenues and their use.  In addition, the government should also have in place, or commit to establish, a functioning system for the independent auditing of such revenue receipts and the public dissemination of the results.  Although these actions are especially relevant to extractive industry projects with significant revenue impacts, they are also applicable to all budget support operations, such as set out in the World Bank's operational policy on Development Policy Lending.  We are actively working to establish these standards and policies at all of the MDBs. 

1.  African Development Bank (AfDB)

Kenya -- Kwale Titanium Mine Project; $40 million loan; 07/26/2006:  The AfDB Board approved this private sector senior loan to Tiomin Kenya Limited for development of dry mining and processing of titanium bearing sand for production and sale of ilmenite, zircon and rutile from Likoni port, Mombassa.  While the project document did not sufficiently address management of project revenues, in the dialogue between the Board and Bank management, concerns were raised about the tax incentives provided by the Government of Kenya and the proper management of revenues stemming from the project.  Due to Bank management's assurances of financial transparency and the project's positive impact on industrial development in Kenya, the United States supported the project.

Zambia -- Lumwana Copper Project; $43 million loan; 09/27/2006:  The AfDB Board approved this private sector senior loan to Lumwana Mining Company Limited for the development of an opencast mine, the construction of a copper concentrate processing plant, a transmission line, water dam, tailing processing facility and associated infrastructure.  Bank management provided assurances to the Board that revenues accruing to the Zambian government from the project would be fully audited and transparent, and that the Bank was working to provide capacity building to Zambia to enable it to fully participate in the Extractive Industries Transparency Initiative (EITI).  Following these assurances, the United States supported the project due to its impact on private sector development in Zambia.

2.  World Bank

Kenya -- Natural Resource Management; $68.5 million loan; March 27, 2007:  The World Bank Board approved this project to support institutional capacity building for managing water and forest resources.  While this project's main objective was to support water and forest resources management, as well as livelihood investments in the watershed, the project also involved the potential for future export of timber.  About 30% of the project's funds involved support for the 2005 Forest Act, which has the potential to improve productivity of plantations to increase availability of timber and other products to Kenya and for export.  The project supported strengthening public financial management including requiring publication of external audit reports, bidding documents and procurement contracts.  The United States supported the project because it would improve natural resources management and because the government and project sponsors were taking steps to improve revenue transparency.

Mauritania -- Second Mining Sector Capacity Building Project; $5 million loan; 07/06/2006:  The World Bank Board approved this additional IDA credit to the project to enhance the transparency with which Mauritania's petroleum resources are developed.  The project would provide training to the government to improve accounting, enhance bidding procedures, and strengthen the legal framework for extractive industries projects, particularly in the petroleum sector, since the Bank and Government of Mauritania judged current policies and practices to be inadequate.  As such, the World Bank's intervention would support the Government of Mauritania's interest in joining and implementing the Extractive Industries Transparency Initiative (the EITI).  While welcoming the Bank's desire to engage in these important issues, the United States abstained from supporting this project, due to concerns about procurement and financial management arrangements, which provide resources directly to the office of Mauritania's President rather than a line ministry, as well as broader concerns about the government's willingness and ability to conduct transparent consultations with civil society, as would be required for a thorough EITI process and Poverty Reduction Strategy. 

3.  International Finance Corporation (IFC)

Asia Region -- Asian Lion Fund; $6 million equity investment; June 1, 2006:  The IFC Board approved this investment in the Asian Lion Fund, a private equity fund which will make separate investments averaging approximately $3 million to support the operational expansion and sustainable development of 8-10 junior mining companies, particularly in countries with identifiable mineral deposits such as China, Indonesia, Laos, Philippines, Thailand, and Vietnam.  The project fits with the World Bank Group's strategy, in particular with key components of the Management Response to the Extractive Industries Review and the on-going World Bank Group Country Initiatives for Mining Sector Development.  This includes the objective of increasing transparency in the extractive industries sector.  The United States abstained on this investment due to human rights legislative mandates (Public Law 95-118, section 701 (1977), as amended).

Egypt -- Gippsland Limited Equity; $4.5 million equity; May 16, 2006:  The IFC Board approved this investment for an 8 percent ownership stake in Gippsland Limited, a mining company listed on both the Australian Stock Exchange and London's Alternative Investment Market.  Gippsland conducts mining exploration and development activities in Egypt; the tantalum mineral is used by foreign producers of electronic equipment.  The IFC's investment financed the completion of a feasibility study for one of two of its ongoing projects in Egypt (Abu Dabbab) and co-financed an exploratory drilling program at its second project (Wadi Allaqi).  IFC also provided mining and metallurgical technical assistance, environmental and social assistance, and corporate governance advice.  Gippsland agreed to publicly disclose all payments of taxes, royalties and dividends to the Government of Egypt from its various projects.  These disclosure requirements also formed part of the Company's listing requirements with the Australian Stock Exchange and London's AIM.  The United States supported the project because the IFC investment would specifically finance the completion of an Environmental and Social Impact Assessment (ESIA) and a public consultation process.  This would help ensure that the project would go forward on a sustainable basis and meet world-class standards for impact assessment. 

Guinea --  Investment in Simandou Iron Ore; $5 million equity; April 11, 2006:  The IFC Board approved this investment in SIMFER Guinea S.A. to finance the completion of exploration activities, feasibility studies, and social and environmental assessments for Rio Tinto's iron ore concession in the Simandou Mountain Range in the Eastern Region of Guinea.  Iron ore will be exported.  Rio Tinto agreed to disclose all payments to the Government, which has fully met the four sign up criteria for the Extractive Industries Transparency Initiative and reconciled and published 2005 revenues from the mining sector.  The United States supported the project because the investment offered the ability to bring in IFC's standards for environmental, health, and safety performance before the company proceeded to exploit the concession. 

Oman -- MB Holding Company; $100 million partial credit guarantee; January 23, 2007:  The IFC Board approved this partial credit guarantee for 50-65% of a bond issued by MB Holding Company LLC, a privately-owned Omani company with subsidiaries engaged in oilfield services, exploration and production of oil and gas, mining, trading and investments.  More than 50 percent of the bond proceeds are expected to be used to expand MB Petroleum Services LLC's (MBPS, the Group's oilfield services subsidiary) operations in countries such as Yemen and India, while the remaining bond proceeds are expected to be used to improve MBPS' financial structure by refinancing its short-term debt and replacing it with long-term debt at the holding company level.  The United States abstained on this guarantee because of lack of additionality and development impact.  It should also be noted that none of the countries where MB Petroleum Services is expected to expand its operations are proponents of the Extractive Industries Transparency Initiative.

South Africa -- Hernic Ferrochrome; $5.4 million loan to shareholders and guarantee; May 18, 2006:  The IFC Board approved this investment to support the completion of the Black Empowerment Entities certification process to enable the company to continue its ore mining operations in South Africa.  Legislation passed in South Africa in 2004 required mining companies beginning in 2004 to sell 15% of their shares to BEES over 5 years to be further increased to 26% over 10 years.  The new legislation also involved major changes to the basis upon which mining licenses were granted, as Hernic was to discover.  The initial IFC investment in Hernic occurred in 2003, prior to the initiation of the World Bank's Extractive Industries Transparency Review process, and we did not review this proposal in the context of the language contained in Public Law 109-102, section 585(c) (2005).  The ferrochrome mined would be used in steel-making in Asia.  The United States supported this investment because it maintained the financial viability of an existing IFC investment and broadened participation by disadvantaged communities in an extractive industry project. 

South Africa -- Lonmin Platinum Group Metals Equity; $50 million equity investment and $100 million loan; December 19, 2006:  The IFC Board approved this investment in Lonmin Platinum Group Metals.  The project supported:  (i) the development, expansion, and mechanization of Lonmin's South African mines; (ii) financing planned transactions regarding broader and more equitable ownership of South African business through Black Economic Empowerment (BEE) participation in Lonmin development programs; and (iii) the development of a comprehensive technical assistance program to strengthen the social sustainability of the client and maximize the development impact of the project and IFC's investment.  Lonmin will export the platinum, according to the IFC.  Lonmin in its annual "Sustainable Development Report" discloses all payments with regard to government taxes, salaries, social capital, directors' renumeration and shareholder distributions.  These disclosure practices are consistent with the objective of increasing transparency in the extractive industries sector.  However, the United States abstained on this investment because it was an environmental Category A project and did not meet the disclosure requirements set out in P.L. 101-240, sec. 521, Pelosi Amendment. 

4.   Multilateral Investment Guarantee Agency (MIGA)

Mozambique -- Guarantee to Standard Corporate and Merchant Bank for a Loan Guarantee and a Loan to Republic Mozambique Pipeline Investment Company; November 9, 2006:  The MIGA Board approved a modification to an initial guarantee approved in 2002 which increased its net exposure from $60.5 million to $90.4 million.  The Sasol Natural Gas project involved the phased extraction, processing, transportation, and utilization of the natural gas reserves in the Pande and Temane field reservoirs in Mozambique.  It has also entailed the conversion of the Sasol Gas pipeline network and customers in South Africa, the conversion of the Sasolburg factory to process gas to its hydrocarbon feedstock, and the conversion of Sasol's Secunda factory to process gas as a supplemental feedstock.  The project will contribute towards developing the Mozambican economy through monetizing its gas reserves.  The GOM will receive significant royalty payments as well as dividends, production bonuses, and corporate taxes in excess of $2 billion over the 25-year lifetime of the project.  The GoM has committed to account for the revenue proceeds from the Project through a line item in its budget.  In addition, the use of the revenues will be reported in the budget execution reports, which are monitored by the World Bank and other donors.  The United States supported this project because it represents the first cross border initiative in sub-Saharan Africa in developing regional natural gas markets.  The export of natural gas is expected to enhance regional trade and stability by further linking the economies of Mozambique and South Africa. 

5.   European Bank for Reconstruction and Development (EBRD)

Kazakhstan -- Bautino Atash Marine and Supply Base Project; $24.0 million senior loan, of which $12.0 million would be for the account of B lenders, and up to $10.0 million in equity split in two tranches; November 7, 2006:  The EBRD Board approved this investment in Balakshy, a limited liability company incorporated in Kazakhstan.  The project will involve the construction, equipment and placing into operation of the marine support and supply base of Bautino to be located in the Kazakh sector of the North Caspian Sea coast, near the village of Atash.  The proposed project will respond to a wide range of off-shore oilfield operators' needs, such as fuel and water provision, support base infrastructure and services, and crew change facilities.  Since Balakshy merely provides services to oilfield operators, there are no natural resource revenues from this project.  Kazakhstan endorsed the Extractive Industries Transparency Initiative (EITI) in June 2005 and is taking steps to implement its principles.  For example, during April 2006, the World Bank, the Government of Kazakhstan, and the EITI National Stakeholders Council agreed on a procedure to select an audit firm to perform the collection and reconciliation of payments and revenues according to EITI criteria.  The United States supported the project due to its positive impact on the Kazakh economy and the positive influence it will have on Kazakhstan's transition to a market economy.