Somit Varma heads the World Bank Group’s fiercely-debated energy, mining and chemicals work. Daniel Litvin asks some key questions
The work of the World Bank Group’s Oil, Gas, Mining and Chemicals (OGMC) department embodies one of the thorniest questions facing these industries. Its mission is ‘to help developing countries and communities realize sustainable economic benefits from natural resources’ – but while supporters see this as constructive and essential engagement with sectors that can help drive development, critics complain of complicity in their sometimes damaging social and environmental impacts.
Short of ending its involvement with the industries – and thereby weakening leverage over them – can the World Bank Group (WBG) find ways to support energy and mining activities that genuinely encourage sustainable development and minimize their negative impacts? And even while these questions are being debated, is the OGMC department at risk of losing influence over the industry as global economic conditions change?
Somit Varma, OGMC's director, explains to Daniel Litvin why he believes the Group’s work with extractive companies and resource-rich governments will continue to help promote development.
Daniel Litvin: The OGMC team aims to translate resource riches into sustainable development, but in the past natural resources have often fostered corruption, instability and economic stagnation in developing countries. Can your work really counteract the powerful dynamics of this so-called ‘resource curse’?
Somit Varma: The number of developed and developing countries who benefit from resource development is considerable (for example Norway, Australia, Botswana, Chile and South Africa). For many developing countries, such as Namibia, the extractive industry (EI) sectors are relatively small but make a useful contribution to jobs and revenues without overwhelming the country. However, very real problems arise when a country experiences a combination of weak governance and substantial resource wealth flows. The key is to improve accountability and revenue management capacity. This is not easy and takes time, and ultimately will depend on a country's own efforts, but the efforts of institutions such as the World Bank Group can and are helping.
Daniel Litvin: WBG involvement in the energy and mining sectors has been controversial, with projects criticized for contributing to a range of social and environmental problems. The Group completed a review of its role in these sectors in 2004: has much changed as a result and do you now feel better able to answer the critics?
Somit Varma: We believe that the projects we support with governments and with the private sector are making a difference and contributing to development and poverty reduction. The review we completed helped us refine our approach in many respects but we need to continue to learn and, with others, develop and refine good practices as we go forward. In the last few years we have adopted several new strategies for how we can maximize the development impact of our projects. For example, all our private sector extractive industry investments now require disclosure of revenues, we systematically track the development impact of our private sector investments and we have set up the community development facility (Comm Dev) to help spread best practices on how companies can work with communities to ensure that local people benefit from EI projects. In our work with governments, we strongly support the implementation of the Extractive Industries Transparency Initiative (EITI) which is promoting transparency of government revenues from the EI sector and continue to expand the Global Gas Flaring Reduction Partnership (GGFR) which is helping combat climate change by reducing gas flaring worldwide. Recently, we adopted a new approach to helping resource-rich countries. Referred to as “EITI++”, we are providing policy advice along the whole of the EI value chain – from the time when investors access exploration and development rights to the collection of taxes to how they are managed and ultimately spent.
Daniel Litvin: Would you say resource-rich countries are getting better at managing the 'resource curse'? What do you think are the two or three most important issues for them to get right?
Somit Varma: There are some signs that this is true. For example, many resource producers have come through the latest boom in better shape than in the past. Revenues have been better managed and in some cases used to pay down debts rather than to underwrite unsustainable spending. Many governments are also more aware of the issues involved in dealing with large scale resource development. The engagement of so many countries in initiatives such as EITI is one sign of a growing awareness of the issues and the need to manage them. However, I would not be too complacent. Many of the “resource rich” countries are in fact not that rich in absolute or per capita terms. EI revenues may be a large part of a small economy but they are not sufficient to transform the lives of their citizens. Substantial sustained development will depend on consistent good governance over a number of years in a broad range of areas.
Daniel Litvin: Some developing country governments are turning to China rather than the World Bank for support in developing their extractive industries; Chinese loans are seen to have fewer strings attached. Is this trend leading to lower environmental and social standards? Is it reducing the WBG’s clout?
Somit Varma: As the Chinese economy grows and its companies expand overseas, its companies and government will become more important players in the area of resource development and development aid more generally. However, a lot of Chinese resource investment is actually taking place in countries such as Canada and Australia where appropriate standards are insisted on. So in many cases, “new” international investors, such as Chinese companies, will learn from and adopt the good practices that they find in place. Companies may not find the same regulations and enforcement capacity in developing countries, and some may operate to lower standards. However, local and international stakeholders are beginning to hold developers to account where they operate. We see an important role for us to help companies take the steps necessary to acquire a social license to operate and to continue working with local and national governments to properly regulate and manage their EI sectors.
Daniel Litvin: Isn’t your leverage over resource-rich governments also limited once oil or mining revenues start to flow? For example, the World Bank had to withdraw from the Chad-Cameroon pipeline project in 2008 after Chad’s President Deby failed to allocate sufficient funds to poverty reduction.
Somit Varma: We aim to engage and use our influence to encourage governments and companies to move in positive directions at the outset of projects. The key is to work with governments to help them achieve objectives that they see as important and to create sustainable policies and capacity that can help promote development and last beyond our engagement. Being involved gives the World Bank Group a seat at the table and enables us to work with governments and companies from a perspective they usually find very valuable. However, it is critical that governments and countries take ownership for ensuring that natural resources benefit the people of the country. Without that ownership and commitment, it is very difficult to ensure that the people of the country will benefit from its natural resources.
Daniel Litvin: If commodity prices continue to recover, might this further limit the influence of the World Bank as budgets become healthier and governments feel less pressure to keep the Bank on side?
Somit Varma: In the last boom, demand for the World Bank Group’s engagement in the sector was stronger than ever from developing country governments and the private sector, and we’re seeing the same today. In general, we are going to be most effective, perhaps we will only ever be effective, when we share a common objective and vision with governments and partners, rather than when we try to impose something from a temporary position of relative strength. In this respect, I would refer again to EITI that has, in the area of transparency, engaged a number of governments who might not have welcomed World Bank engagement in the area, but have taken it up because it is a voluntary initiative whose objectives and approach they “own”.
Daniel Litvin: Big resource companies have generally improved their management of social and environmental issues over the last few decades. But would you say that they have made 90% of the necessary progress, or more like 50%?
Somit Varma: Companies have improved their approach significantly and deserve credit for this. But our knowledge of issues changes over time, standards demanded by stakeholders rise, and new issues emerge. So it is better to recognize the need for continual progress rather than a belief that we are almost there.
Daniel Litvin is director of Critical Resource, a consultancy on social, political and environmental risk management. www.c-resource.com
Ethical Corporation will host a two day conference on how major industrial and extractive firms are managing social, political and environmental risk in London on March 22-23 2010. For more information and to register go to: http://www.ethicalcorp.com/risk-management.