House of Commons - International Development

Select Committee on International Development Written Evidence

Memorandum submitted by The Baku Ceyhan Campaign

UK OVERSIGHT OF INTERNATIONAL FINANCE CORPORATION: LESSONS FROM THE BAKU-TBILISI-CEYHAN OIL PIPELINE PROJECT

1. The Baku Ceyhan Campaign is a coalition of four UK non-governmental organisations—The Corner House, Friends of the Earth, Kurdish Human Rights Project and Platform—which was established in 2001 to raise public awareness of the social problems, human rights abuses and environmental damage that will be caused by the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, which is planned to run through Azerbaijan, Georgia and Turkey. In particular, the Campaign argues that public money should not be used to subsidise social and environmental problems, purely in the interests of the private sector, but must be conditional on a positive contribution to the economic and social development of people in the region.

2. The pipeline is to be built by BTC Company (BTC Co.), an 11 member coalition of oil companies led by BP. BTC Co. is seeking around 70%, or $2.5 billion, of the cost of the project from loans. BP has stated that the project can proceed only if it receives "free public money"[3] and has therefore sought public funding from the World Bank's private sector arm, the International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD) and a number of official Export Credit Agencies (ECAs), including Britain's Export Credits Guarantee Department (ECGD). If completed, the BTC pipeline would transfer a million barrels of oil a day from the Caspian Sea to Western markets. The long-term attempts of the US to ensure its energy security through access to Caspian oil have been well documented[4]; consequently, the political pressure to complete this project is extremely high. At the time of writing no decision has yet been made as to public funding for the project. However, the IFC is due to consider the project at its 30 October 2003 board meeting, while the EBRD is scheduled to do so on 11 November.

3. The Baku Ceyhan Campaign and other non-governmental organisations nationally and internationally have raised a series of concerns relating to the human rights, developmental, environmental and climate change impacts of the project which remain unresolved (see Annex 1 for further details).[5] In order to bring these concerns to the attention of the UK Government, the Campaign has facilitated visits by non-governmental organisations from Turkey, Azerbaijan and Georgia to meet with UK Government departments; undertaken four Fact Finding Missions to the region to assess its human rights, developmental and environmental impacts; participated in official consultation processes; and commissioned both an independent financial analysis of the project and an opinion from legal Counsel on the potential conflicts between the legal agreements for the project and Turkey's accession agreements with the European Commission.

4. Most recently, as part of the public consultation process on the Environmental Impact Assessment (EIA) for the project, the Campaign issued a 220-page review of the extent to which the EIA and Resettlement Action Plan (RAP) for the Turkey section of the pipeline comply with the World Bank's operational policies and safeguards and other standards to which the project is legally committed (summary attached as Annex 1[6]). The review found that, despite being passed by the IFC and EBRD staff as "fit for purpose", the project continues to breach every one of the relevant World Bank safeguard policies on multiple counts, in addition to violating other project standards. In all, the review identified at least 173 partial or total violations of mandatory applicable standards, including:

— 153 partial or total violations of IFC and EBRD Operational Policies;

— 18 partial or total violations of the European Commission's Directive on EIA; and

— two direct violations of other Turkish law.

Because compliance with these standards is required under the legal regime for the project, such violations of relevant standards put the project potentially in conflict with host country law. As such, the project appears to be in fundamental breach of the IFC's requirements that the projects which it finances comply with domestic law. The Campaign has therefore argued that the UK Government was duty bound not to support the project while these violations remain unresolved.

5. This memorandum summarises the Baku Ceyhan Campaign's experience of UK oversight of the IFC's involvement in the BTC project, as exercised by the Department for International Development (DFID), the government department responsible for instructing the UK representatives at the board level in the World Bank Group. Regrettably, that experience has not been encouraging. On the contrary, the Campaign has found that DFID's handling of the project has been characterised by:

— a consistent failure of DFID staff—particularly at the senior level—to familiarise themselves with project documents and with the requirements of the World Bank's safeguard policies;

— a failure of DFID staff to follow up on commitments made to investigate concerns raised by non-governmental organisations working with affected communities;

— an over-reliance on IFC assessments of the project—this despite recent internal World Bank reports criticising IFC staff for failing to implement the World Bank's safeguard policies;

— a refusal even to consider project implementation, relying solely on the project consortium's claims on paper when assessing the project's Environmental Impact Assessment's compliance with IFC safeguard policies, despite well-documented problems at the implementation level—an approach that directly conflicts with DFID's own policy with regard to the World Bank's future involvement in oil projects;

— a failure to allay NGO concerns that UK involvement in the project reflects political considerations rather than policy coherence with DFID's stated objectives; and

— a failure to integrate climate concerns into World Bank lending policy.

6. The Campaign has also had access to the report on the project prepared by IFC staff for the IFC Board. The report raises major questions about the reliability of the information provided to the UK Executive Director by the IFC—an issue of serious concern given that the staff report constitutes the prime source of information on which IFC Executive Directors (EDs) rely when making a decision on a loan. Critically, the report omits either to mention or to elucidate major concerns of material interest with regard to the project's legality, its lack of compliance with IFC standards and its potential for exacerbating conflict in the region. It also contains factual errors that bias the report in favour of the project.

7. The above concerns are set out in more detail below:

A. A consistent failure of DFID staff—particularly at the senior level—to familiarise themselves with project documents and with the requirements of the World Bank's safeguard policies.

The Baku Ceyhan Campaign has held three meetings with DFID, each at the request of the Campaign. The first two meetings were minuted: the minutes of the third meeting, which took place on 20 October are being written up. All three meetings were attended by representatives of other departments.

With the exception of the ECGD representative who attended the first and second meetings, the government officials present showed either a complete lack of knowledge about the project (acknowledged by the FCO representatives) or a failure to have familiarised themselves with all but its most superficial details. Moreover, despite DFID's assurances at each meeting that they would take NGO concerns seriously, each follow up meeting revealed that DFID staff had failed to take on board the critiques raised by NGOs or even to have read the documents submitted by them in any depth. At no point did DFID staff offer a constructive reciprocal exchange of information on the project; instead, they merely reiterated time and again that they were "in listening mode". It is impossible to tell whether this stemmed from an unwillingness to share information gleaned from other sources or a simple lack of knowledge about the project, although the impression is that the latter is closer to the mark.

Worryingly, given DFID's responsibility for exercising oversight over the IFC, DFID's senior staff appeared unaware of key provisions in the IFC's safeguard policies and thus of the significance of a number of problems which NGOs had identified as potential breaches of IFC guidelines. At no point, for example, did DFID or other HMG staff at the most recent meeting show any familiarity with the Baku-Ceyhan Campaign review, issued two weeks previously, which identified at least 173 violations of mandatory applicable standards. This not only indicates a lack of knowledge of the project and its failures on the part of DFID, but also calls into question the Department's commitment to the principles of public accountability and disclosure.

B. Failure of DFID staff to follow up on commitments made to investigate concerns raised by non-governmental organisations working with affected communities

At the first meeting held among DFID, the Baku Ceyhan Campaign and NGOs from Azerbaijan, Georgia and Turkey, DFID and other UK Government departments gave three undertakings. First, to investigate the potential of the pipeline to exacerbate conflict in the region (the pipeline passes through or near 11 conflict zones, including the Kurdish region of Turkey). Second, to investigate corruption allegations surrounding the Production Sharing Agreement for the Azeri, Chirag and Deepwater Guneshli (ACG) oilfield. And, third, to assess the implications of the open-ended liabilities inherent in the Host Government Agreements for the project for Georgia's debt sustainability.

Although these commitments were made by various departments, DFID stressed it was committed to "joined up" government and that there would be co-ordination on following through.

Prior to the second meeting held with DFID, it was agreed that DFID would open the session by reporting back on the progress it had made in meeting these commitments. DFID subsequently sought to renege on this. Given that the meeting had specifically been arranged for regional NGOs visiting London to follow up on their previous meeting with DFID, the Campaign insisted that DFID stick to its agreement. Only one department present at the meeting—ECGD—was able to report any progress in following up on the commitments it had previously made (examining corruption allegations and debt sustainability issues), although it was unable to supply NGOs with details of its findings. The other departments present—DFID and the FCO—were forced to admit either that they knew nothing of the prior commitments or that they had not undertaken any work on them. Since these commitments had been made to groups from Azerbaijan, Georgia and Turkey as well as those based in the UK, these failures cast doubt on DFID's ability to facilitate transparency and accountability with regard to the BTC project.

Although the Foreign Office subsequently published a general conflict analysis for the region, no analysis of the specific implications of the pipeline has been published.

C. An over-reliance on IFC assessments of the project—despite recent internal World Bank reports criticising IFC staff for failing to implement the World Bank's safeguard policies

In May 2003, the IFC's own internal watchdog—the Compliance Advisor Ombudsman (CAO)—reported major concerns about the IFC's due diligence and project approach procedures. Among other problems, it highlighted a failure of IFC staff to ensure compliance of projects with IFC safeguard policies, noting:

On the application of the Indigenous People's policy—an issue of considerable contention with respect to the BTC project as a result of the IFC's decision not to apply the policy—the CAO likewise concluded:

The need for heightened oversight of the IFC by DFID would appear clear, particularly in the light of such criticisms. DFID, however, refused to undertake field research to verify the IFC's assessment of project compliance with World Bank standards, arguing that it would be inappropriate for it to do so. In light of the vast gulf between the IFC's assessment and that of NGOs, such a refusal is difficult to reconcile with DFID's clear duty to demonstrate good governance within the World Bank by ensuring that the lessons of the CAO report are acted upon. Indeed, DFID's failure to undertake its own field research might reasonably be interpreted as a signal that the findings of the CAO are not being taken with the seriousness they undoubtedly merit.

Instead, DFID seems to prefer to rely for "ground-truthing" on the accounts of BTC Co and IFC staff. IFC, having declared the project "fit for purpose", has a clear vested interest in seeing the project go through, as has BTC Co. This forms part of a wider pattern noted by NGOs among the development banks: when challenged by NGO critiques on the project, IFC and EBRD frequently turned to BTC Co. to check the validity of NGO claims, most of which they unsurprisingly rejected. This renders DFID's failure to undertake independent validation all the more serious—the strong impression is left that the project sponsors and funders have continually "passed the buck" amongst themselves without properly engaging with local and NGO concerns.

Although, to its credit, the ECGD met with a group in Turkey which had relayed concerns over resettlement provisions to DFID, ECGD staff were unable to visit villages in the region to hear first hand of the villagers' complaints. The only other non-governmental groups with whom the ECGD met were consultants employed by BP. At the time that DFID made its decision as to IFC support for the project, it is understood that ECGD was still investigating concerns that affected landowners were not being compensated for "orphan" plots created by the pipeline, in contravention of BTC's undertakings.

D. A refusal even to consider well-documented problems relating to project implementation when assessing the project's Environmental Impact Assessment's compliance with IFC safeguard policies—an approach that directly conflicts with DFID's own policy with regard to the World Bank's future involvement in oil projects.

On 9 September 2003, DFID announced that it would commission an independent environmental consultant to review the Environmental Impact Assessment for the BTC project and make their report public, a move that was welcomed by the Baku Ceyhan Campaign. As stated on DFID's website, the terms of reference (TOR) for the consultant were to "assess how the EA is compliant with IFC and EBRD policies, procedures and guidelines". However, investigations by the Campaign have revealed that DFID has explicitly limited the scope of the review to an examination of whether or not the EIA complies with World Bank standards on paper: consideration of potential violations arising from implementation of the project is excluded.

The Baku Ceyhan Campaign finds this completely unacceptable and mystifying, since it renders the entire assessment flawed. Evaluation of implementation is integral to any accurate evaluation of the project. Ample evidence has been provided by NGOs to both DFID and other departments that many of the claims made in the EIA with regard to the extent and nature of consultation and land compensation have proved false when checked out through field visits. In such circumstances, to base any decision on funding the project purely on EIA's "paper compliance" with IFC and EBRD standards is likely to be at best unsafe, at worst highly damaging to the interests of the poorest sections of the affected communities.

DFID's restricted evaluation directly conflicts with its own stated policy on the World Bank's future involvement in oil projects. On 13 September 2003, just days after the consultant's review of the BTC EIA was commissioned, Baroness Amos, then Secretary of State for International Development, wrote to the chair of the World Bank's own Extractive Industries Review encouraging the World Bank Group to:

The Baroness went on to state:

"The potential and often unavoidable negative environmental and social impacts associated with the extractive industries . . . calls for strict adherence to social and environmental policies and management standards . . . We believe it is critical to move safeguard policies from compliance checklists to more strategic consideration of development benefits".

Significantly, the Government specifically recommended the use of Strategic Environmental Assessment to fulfil such goals—an exercise that the BTC consortium has failed to undertake, despite it being required under the project's legal framework.

It is difficult not to conclude that DFID's narrow interpretation of the TOR for the review of the EIA reflects either a lack of "joined-up government" or, less charitably, an attempt to limit inquiry in order to push the project through the IFC, whilst appearing to give the issue of compliance proper consideration. Given DFID's well-earned reputation for promoting sustainable development, it would be regrettable if such an interpretation were to gain wide currency, particularly when the remedy—a full assessment of the EIA and a delay in order to ensure that it is properly carried out—is readily to hand.

E. A failure to allay NGO concerns that UK involvement in the project reflects political considerations rather than policy coherence with DFID's stated objectives

In discussions with international NGOs in late October 2003, a number of Executive Directors of the IFC have stated that the BTC project is "highly political" and that politics would determine the outcome of the IFC's Board decision. This interpretation is consistent with the centrality of the project to US energy policy.

Discussions with DFID staff have failed to allay NGO concerns that UK involvement in the project will reflect political considerations rather than policy coherence with DFID's stated objectives, notably poverty alleviation.

F. The IFC staff's report to the IFC Board omits significant facts material to an assessment of project risks and is highly misleading as to the project's impacts

Prior to the IFC board decision on the project, the Baku Ceyhan Campaign obtained a leaked copy of the IFC staff report to Executive Directors. The Campaign has analysed the document and was shocked by its failure to report a range of material facts that would be central to enabling the board to make an informed decision as to project risks, legality, compliance with IFC standards and benefits. For example:

— Although the pipeline passes through areas where PKK Kurdish guerrillas were active during the recent 18-year armed conflict between the PKK and the Turkish state, the report fails to mention that the PKK has now abandoned its unilateral cease-fire or that it has specifically named pipelines as "legitimate targets".

— The report states that Armenia, Iraq and Syria have been notified as to potential downstream impacts from oil spills, as required under the Bank's safeguard policy on International Waterways. However, it fails to inform Executive Directors that general international law requires not only notification but also consultation and negotiation, neither of which are reported to have taken place.

— The report neither mentions, nor responds to, the 173 violations of World Bank safeguard policies, project standards and host government law that NGOs have identified, despite IFC staff being informed of them during the EIA public disclosure period.

— The report fails to mention that the European Commission is currently assessing a complaint submitted by NGOs over conflicts between the legal agreements for the project and Turkey's accession agreements with the EC. Yet IFC staff have publicly acknowledged that a ruling by the EC in favour of the NGO's case would mean that the IFC could not fund the project.

— Although the report stresses the multi-layered monitoring procedures for the project, it fails to mention that the BTC Consortium had failed to comply with its commitment to publish an external resettlement review at the beginning of September, as required under its resettlement monitoring plan. At the time of writing (27 October), the report has still to be published.

G. Failure to integrate climate concerns into World Bank lending policy

Climate concerns over the BTC pipeline have repeatedly been raised by NGOs in meetings with DFID. In addition, 4,000 letters were delivered from members of the public to DFID and thousands of others participated in e-mail actions. Yet DFID has failed to respond to the concerns raised.

Again, this suggests major incoherence. In 1997, the White Paper on international development recognised that "climate change is perhaps the most serious global environmental problem we face"[10] and committed the Government to ensuring "that the full range of Government policies, affecting development countries, including environment, trade, investment and agricultural policies, takes account of our sustainable development objectives".[11]

This policy was strengthened by another White Paper three years later which said "the UK Government will work with developing countries to ensure that their poverty reduction strategies reflect the need to manage environmental resources sustainably" and with "developing countries and the IMF and World Bank to better integrate environmental sustainability into poverty reduction strategies".[12]

However, we believe these commitments have still to be fully implemented. Support for our view has come from another recent report from the House of Commons International Development Committee which reviewed the relationship between climate change and development policy. It concluded that "environmental issues and poverty are closely linked and must be tackled together" but that "DFID, along with most other donors, has paid too little attention to global climate change".[13]

In particular, the Committee stressed that "work undertaken to mitigate the effects of greenhouse gases should not be undermined by other policies, such as support given to fossil fuel projects where suitable renewable alternatives exist". It argued that "subsidies that distort water, energy and transport markets need to be reformed" and said DFID "should press multilateral agencies to consider energy sources and efficiency and where appropriate and possible, donors should foster the use of renewable sources of energy".[14]

The Government's response to the Committee reported important steps taken by DFID with other development agencies to link poverty reduction and environmental management,[15] to link poverty with climate change[16] and to develop energy policies that benefit poor people.[17] Yet, the response makes clear that DFID considers its priority is to help developing countries adapt to climate change.[18] It fails to address the recommendations made by the Committee on further steps the Government should take to mitigate the threat of climate change beyond arguing that "it would be wrong for developing countries to be denied options that were available to developed countries"[19] and claiming that "DFID and others have moved away from a paternalistic relationship where recipient countries respond to donor priorities".[20]

We recognise the importance of adaptation, and especially disaster preparedness. We note that the Select Committee had itself recommended that work on "adaptation should be DFID's main priority in terms of action on climate change"1[21] But we would argue that this does not imply that work on adaptation should be DFID's only priority in terms of integrating climate change into development policy.

We recognise also the right of developing countries to choose development paths that meet their needs. Our concern is, ironically, that existing subsidies for fossil fuels push developing countries into development paths that do not meet their long term needs—and which will cause them harm.

The point has been recognised by DFID itself. The joint report it published on linking poverty reduction and environmental management says "environmentally harmful subsidies are a key area for policy reform" and that "the largest such subsidies are handed out in industrial countries".[22] DFID's own paper Energy for the Poor recognizes that "subsidies are frequently part of government policy towards the energy sector, but they can lead to great inefficiencies"[23] although it only considers subsidies paid by developing countries themselves.

We believe that DFID has implicitly recognized the importance of eliminating harmful subsidies to the energy sector both because of their inefficiency and to ensure that development policy takes full account of the need to limit climate change. Evidence suggests that subsidies to oil exploitation are particularly iniquitous. Now is the time to review them.

8. The above experience suggests a failure on the part of DFID to exercise the oversight of the IFC that parliament has entrusted it to conduct. A number of questions suggest themselves, which the Committee may wish to explore:

(1) What steps has DFID taken to investigate the 173 violations of World Bank standards, project standards and host country law that the Baku Ceyhan Campaign and other NGOs have identified in project implementation?

(2) How does DFID reconcile its statement to the Extractive Industries Review on the importance of ensuring that project implementation complies with World Bank safeguard policies with its refusal to investigate such on-the-ground compliance as part of its assessment of the EIA for the BTC project?

(3) What steps has DFID taken to address the institutional failures in IFC procedures identified by the IFC's Compliance Advisor Ombudsman?

(4) What investigations has DFID undertaken on the conflict implications of the BTC project? And will they be made public?

(5) Has DFID satisfied itself that the project complies with international customary law on transboundary waterways? Can it assure the Committee that Armenia, Syria and Iraq have not only been notified as to the project's potential threat to shared waterways but also consulted and given the opportunity to negotiate unresolved concerns?

(6) What legal due diligence has DFID undertaken on potential conflict between the Host Government Agreement signed between Turkey and the BTC Consortium and Turkey's accession agreements with the European Commission? How does DFID intend to ensure that locally affected people obtain easy access to legal redress in cases of human rights or other abuses, which the project agreements arguably preclude?

(7) What assessments has DFID undertaken of the debt implications of Georgia's undertakings under its Host Government Agreement with the BTC Consortium, notably its undertaking to compensate the consortium for any new laws that impinge on the profitability of the project?

(8) What steps is DFID to integrate climate concerns into its lending policy with respect to the World Bank?

October 2003

3 Corzine, R, "Wisdom of Baku pipeline queried", Financial Times, 4 November 1998, p 4. Back

4 See eg PLATFORM, Some Common Concerns: Imagining BP's Azerbaijan-Georgia-Turkey Pipelines System, London, 2002. Back

5 More information on the Baku-Ceyhan Campaign can be obtained from its dedicated website www.baku.org.uk which contains fact-finding mission reports, legal submissions and press releases, as well as contact details for staff and participating NGOs. Back

6 Full review available at www.baku.org.uk/eia_review.htm. Back

7 IFC Compliance Advisor Ombudsman, www.cao-ombudsman.org/ev.php?URL_ID=1669&URL_DO=DO_TOP, p 25. Back

8 Ibid, p 34. Back

9 The UK Government's Submission to the World Bank's Extractive Industries Review, September 2003. Back

10 Department for International Development (1997) Eliminating World Poverty: A Challenge for the 21st Century Panel 20. Back

11 Ibid 3.2. Back

12 Department for International Development (2000) Eliminating World Poverty: making globalisation work for the poor p 77 and 83. Back