Statement of IFC about the Report by Dr. Jay Hair on the Pangue Hydroelectric
(July 15, 1997)
In response to a complaint submitted by a Chilean organization, International
Finance Corporation (IFC) (see note) commissioned Dr. Jay Hair to review
IFC's handling of the environmental and social aspects of the Pangue hydroelectric
project in Chile, for which IFC's Board of Directors approved debt and
equity financing in 1992. Specifically, Dr. Hair was asked to determine
the compliance of the Pangue project with applicable World Bank requirements
and with the agreed environmental and social mitigation measures.
This statement constitutes IFC's response to the Hair Report. It is not
intended to be a comprehensive point-by-point response, but it does seek
to place the Pangue project in context and to address the most significant
issues raised in the Report. IFC management considers the report useful,
agrees with a number of its findings and conclusions and believes some
are open to legitimate debate. However, IFC does not agree with other findings
and conclusions. While some of IFC's processes were flawed, the project
itself was substantially improved from the environmental and social standpoints
as a result of IFC's involvement.
The Hair Report provides a historical retrospective on the Pangue project,
which IFC agreed to finance in December 1992 as a stand-alone project.
The Report contains strong criticism of the processes followed by IFC from
the first review of the project in 1990, through Board approval in 1992
and disbursement of project funds in 1994, including the conclusion that
IFC did not substantially comply with many of the applicable policies and
procedures. IFC accepts a number of the Report's conclusions and agrees
that the handling of the project could have been better. IFC has learned
a number of lessons from the Pangue project:
IFC should have taken a more systematic approach to the analysis of environmental
and social impacts in the Pangue project.
IFC should have waited for more complete information and analysis of the
downstream impacts of the dam, before making certain key decisions to move
forward with financing for the project.
IFC should have handled the indigenous peoples issues more thoroughly and,
in particular, assessed indirect impacts of the project on indigenous people.
IFC considers that the Pangue project complied with five out of eight policies
and procedures applicable to the project; IFC should have ensured that
the Pangue project complied in all respects with the other three policies
(on cultural properties, indigenous peoples, and dams and reservoirs).
However, IFC management disagrees with Dr. Hair's methodology and conclusions
in determining that the project was not in substantial compliance with
many applicable World Bank requirements and his allegations that IFC's
Board was not fully informed.
Furthermore, the Hair Report does not recognize that IFC substantially
improved the environmental and social aspects of the Pangue project:
Before IFC became involved in the Pangue project, the Chilean government
had already authorized the project, and IFC believes that the project would
have proceeded even without IFC's involvement.
As a result of IFC's involvement, an environmental impact assessment (EIA)
was prepared for the project and publicly disclosed in Chile; a wide variety
of Chilean stakeholders were consulted; an ecological station was established
to monitor the effects of the project and to rehabilitate affected lands;
a minimum flow was required to protect the environment downstream of the
dam; and a downstream monitoring program was established.
As a condition of IFC's financing, a plan of operation was developed based
on three years of monitoring data which imposes constraints on the operations
of the dam to address (i) human safety factors; (ii) downstream irrigation
demands; and (iii) protection of downstream fisheries habitat through maintaining
at all times a minimum ecological flow as recommended in the November 1993
downstream study and through other operating constraints set out in the
IFC's involvement resulted in the establishment of the Pehuen Foundation,
an innovative mechanism for bringing project benefits to the local indigenous
peoples. Furthermore, the project established a construction impact minimization
program to reduce disruptions to local communities, and provided employment
opportunities for a significant number of Pehuenche.
The Pangue project provides much-needed clean, renewable energy for Chile,
with limited environmental and social impacts. It is important to place
this project in the proper perspective:
Pangue is essentially a run-of-the-river plant with storage capacity allowing
for only daily regulation. Accordingly, its environmental impacts on the
river system are far less than those of large reservoirs allowing for seasonal
or multi-year regulation.
Eight non-indigenous families (53 people) had to be resettled because of
the building of the Pangue project. As the Report acknowledges, they were
resettled in full compliance with World Bank requirements.
The World Bank recently reviewed its experience in financing 50 large hydroelectric
projects; in comparison to these 50 projects, Pangue has one of the lowest
environmental and social impacts. For example, Pangue flooded only one
hectare of land per MW of installed capacity and resettled only 53 people.
Since a number of issues admittedly remained unresolved during the implementation
of the project, IFC began negotiations with Pangue S.A. to find constructive
ways to address these issues. After lengthy negotiations, IFC and Pangue
S.A. signed an agreement on April 25, 1997. The agreement details the steps
to be taken to address outstanding environmental and social issues arising
from IFC's investment in the Pangue project (see here).
This statement accompanies the public release of those portions of the
Hair Report that relate to IFC's own performance, including the Report's
assessment of whether the project complied with World Bank policies and
IFC procedures. It was the responsibility of IFC to make sure that the
project complied with applicable policies and procedures, and IFC determined
at the time of project approval and disbursement of funds that the project
was in compliance. The remaining portions of the Report are not being released
based on the advice of external legal counsel.
PANGUE: THE CONTEXT
The Pangue project, with a total cost of $367 million, is a 450MW hydroelectric
dam on the Bío-Bío River in Chile. The project was implemented through
Empresa Eléctrica Pangue, S.A. (Pangue S.A.), a company owned 97.5% by
Empresa Nacional de Electricidad S.A. (ENDESA), Chile's leading electric
power company. The remaining 2.5% is owned by IFC. IFC was first approached
by ENDESA, the project sponsor, in 1989 and undertook its appraisal of
the project from 1990 to 1992. In December 1992, IFC's Board approved equity
and loan investments in Pangue S.A., upon management's recommendation that
resolution of outstanding environmental issues related to the downstream
impacts of the project be made a condition of disbursement. In December
1993, prior to first disbursement, IFC Management submitted a further report
to the Board addressing the outstanding issues. The project is now completed
and supplying electricity to the Chilean grid.
At the time IFC was approached by ENDESA in late 1989, the Pangue project
had already been approved by the Chilean Government. The proposed project
attracted the strong opposition of Chilean and international NGOs. The
Pangue project led many Chileans to focus on the relationship between rapid
natural resource-based growth and protection of the environment and an
In 1989, IFC was in the initial stages of establishing its in-house environmental
capacity and had just hired its first environmental specialist. The Pangue
project brought into focus for the Corporation the difficult question of
how to fulfill its mandate to promote private sector infrastructure, while
ensuring protection of the environment and mitigation of the project's
impact on an indigenous people. With its growing energy needs, Chile needed
to generate additional power. The options were thermal or hydroelectric.
IFC commissioned an independent study of power generation options for Chile,
including the scope for improved energy conservation and efficiency. The
study concluded that the Pangue project was the least cost alternative
from both an economic and environmental perspective.
Early in its appraisal process, IFC determined that the project was financially
viable and therefore met the market test which the Corporation applies
to its undertakings. While the decisions on site selection and basic design
had already been taken, IFC believed it could make a substantial contribution
to the environmental and social quality of the project, given that the
project had already received regulatory approval. IFC was convinced then,
and remains convinced, that its contribution helped to improve the environmental
and social aspects of Pangue.
IFC appraised the project between 1990 and 1992 and accepted a number of
environmental studies and commitments that would be considered inadequate
by today's standards. While IFC recognized that there were some shortcomings,
it moved the project forward on the basis that acceptable environmental
and social assessments and mitigation plans would subsequently be completed,
and that the recommendations would be adopted. In particular, consistent
with the environmental procedures in place at the time, IFC deferred the
resolution of issues relating to downstream impacts until prior to the
disbursement of IFC's loans, rather than prior to submission of the project
to its Board for approval.
In the early 1990's, IFC did not give environmental concerns the weight
they are given today in connection with overall institutional decision-making.
Since the Pangue project was approved, substantial strengthening of IFC's
environmental procedures and institutional capacity has occurred. For example:
The purpose and content of environmental assessment, analysis and review
have been clarified.
In 1993, the year after Board approval of the Pangue project, IFC adopted
a revised Environmental Review Procedure for its future operations which
requires that all major issues be satisfactorily resolved prior to Board
IFC now provides increased information and guidance to all project sponsors
regarding information required and the criteria used to judge a project's
In July 1994, IFC adopted a policy on disclosure of information, subsequently
strengthened in 1995.
Since January 1996, for all projects that may result in significant environmental
and social impacts (Category A projects), IFC has been requiring development
of a plan for and implementation of a program of public consultation and
disclosure directed to those potentially affected by a proposed project.
In April 1995, an IFC Vice President was given corporate oversight responsibility
for environment and public disclosure issues.
IFC is now sharing skills with the World Bank in key areas, especially
In 1996, IFC started building its social science capabilities to assess
the social impact of the projects it considers for financing.
Today, management attaches greater importance to environment and social
issues in the approval and monitoring process of projects financed by IFC.
In November of 1995, the Chilean organization Grupo de Acción por el Bío-Bío
(GABB) sent a complaint to President James Wolfensohn, claiming that IFC
had violated World Bank environmental and social policies pertaining to
the Pangue project. The complaint asked for a review of its claims by the
World Bank Inspection Panel. Because the Inspection Panel does not have
jurisdiction over IFC projects, President Wolfensohn and Executive Vice
President Jannik Lindbaek made a management decision to commission a review
of IFC's performance with respect to the project and selected Dr. Jay Hair
for the assignment.
The reviewer, Dr. Jay Hair, formerly President of the National Wildlife
Federation and the International Union for the Conservation of Nature and
Natural Resources, began his investigation in May 1996. Dr. Hair and his
colleagues reviewed IFC's project files, visited the project site, conducted
some interviews with interested parties in Chile and met with a limited
number of IFC staff in Washington. The Report was delivered to Messrs.
Wolfensohn and Lindbaek on April 7, 1997. The Report covers events up to
January 31, 1997.
Dr. Hair and his colleagues describe their work as a performance audit
with two objectives: (1) to determine compliance of the Pangue project
with "applicable World Bank Group environmental and social requirements",
and (2) to determine the compliance of the Pangue project with all environmental
and social components as specified in the Environmental Management and
Monitoring Plan. Under each objective there are nine audit topics each
dealing with a specific subject -- for example, indigenous peoples or downstream
impacts. Finally, the Report presents a number of conclusions and recommendations
divided into those relating to the Pangue project and institutional recommendations
directed to the World Bank Group and IFC specifically.
The Report is very critical of IFC's performance during the project appraisal
and implementation phases of the project. In sum, the Report alleges that
IFC did not comply fully with the great majority of relevant World Bank
environmental and social policies that the Report considers applicable
to the Pangue project. As previously stated, IFC management agrees with
a number of the findings and conclusions of the Report, considers some
to be open to debate and disagrees with others.
IFC has decided to release the majority of the Report consisting of all
portions of the Report which focus primarily on assessing the Corporation's
own performance in the handling of the Pangue project. Conversely, and
in accordance with IFC's policy on disclosure of information, those aspects
which focus primarily on Pangue S.A.'s performance are not being released
in the absence of its express consent. To date, such consent has not been
In disclosing information about the projects it finances in the private
sector, IFC must balance a competing set of objectives. As a public institution
IFC has an obligation to be open and transparent in its activities and
has a responsibility to lead by example. Simultaneously, in order to preserve
its effectiveness in the private sector marketplace, IFC must respect business
confidentiality and avoid disclosure that would materially harm the business
and competitive interests of its clients. Failure to do so would jeopardize
the Corporation's capacity to fulfill its development mandate and could
expose the Corporation to adverse legal action. Pangue, S.A. contends that
a number of statements and conclusions in the Report relating to its performance
and that of its parent ENDESA are erroneous and defamatory and that others
are confidential. According to advice of external counsel, therefore, the
release of the full Report could expose IFC to costly litigation and possible
IFC's decisions with respect to public release of the Report are not based
in any way on the positive or negative nature of the content of the Report.
As can be seen from those portions that are being released, the Corporation
is not trying to conceal criticism of its own performance.
MAIN THEMES OF THE REPORT AND IFC RESPONSES
This section summarizes the Report's primary conclusions on IFC's performance
in the Pangue project, along with IFC's response.
1. IFC's Role in Improving the Pangue Project
The Report: "From an environmental and social perspective IFC added
little, if any value, to the Pangue Project."
IFC Response: IFC rejects this conclusion. IFC demonstrably added considerable
value to the Pangue project. The following are the most significant achievements
resulting directly from IFC's participation in the Pangue project. Many
were not required under Chilean law and some were first of their kind in
On environmental issues, IFC:
required the preparation of an environmental impact assessment (EIA) for
required consultations with a wide range of stakeholders concerned about
required public disclosure of the EIA and other environmental reports in
Chile, both at the project site and in the capital, Santiago;
required the establishment of an Ecological Station to monitor impacts
of the project and to implement and guide mitigation plans;
required the maintenance at all times of a minimum flow to protect the
environment downstream of the dam;
required a monitoring program to protect downstream water users and the
ecology of the Bío-Bío River;
required the development of operational rules for the dam based on downstream
ecological needs, the rights of downstream water users, and human safety
concerns, resulting from three years of monitoring data; and
obtained a commitment to study the cumulative impacts of any future dams
the project sponsor might propose to build on the Bío-Bío River system.
On social issues, IFC:
negotiated the establishment of the Pehuen Foundation, an innovative development
institution to bring project benefits to the local indigenous peoples;
required the development and implementation of a resettlement plan for
the 8 non-indigenous families displaced by the project;
required a community benefits program during the construction phase to
provide training and employment for the local population; and
required that the construction impact minimization program reduce disruptions
to local communities.
IFC has continued to follow up on these environmental and social measures
and recently reached an agreement with Pangue S.A. on additional steps
(as discussed below).
2. Compliance with Applicable Policies and Procedures
The Report: "The single most important conclusion of this performance
audit [was] that IFC did not follow fundamental World Bank Group requirements
in any consistent or comprehensible manner throughout the development and
implementation of the Pangue Project."
IFC Response: It was the responsibility of IFC staff and management to
make sure that the project complied with applicable policies and procedures.
IFC determined at the time of project approval and disbursement of funds
that the project was in compliance with applicable requirements. It was
reasonable for Pangue S.A. to accept IFC's interpretation of its own procedures
and policies. Accordingly, IFC believes that the question of the project's
compliance with internal policies and procedures relates to IFC's own performance.
Under IFC's environmental review procedure in place during the period when
IFC appraised the Pangue project ("Procedure for Environmental Review
of IFC Projects" in effect from March 1990 to December 1992), IFC
projects were required to be "consistent with the spirit and intent
of the appropriate World Bank policies" as well as to comply with
IFC's own environmental review procedures. Accordingly, in IFC's view,
the following were applicable to the Pangue project to the extent relevant
to private sector projects: three successive IFC environmental review procedures,
which applied at different stages of the project (March 1990 to December
1992, December 1992 to September 1993, September 1993 to present), and
five World Bank environmental and social policies (dams and reservoirs,
involuntary resettlement, indigenous peoples, wildlands, and cultural properties).
In determining whether the Pangue project complied with IFC procedures
and World Bank policies, the Report does not take account of how IFC or
the World Bank interpreted these requirements at the time. The Report presents
the authors' interpretation of the World Bank policies and IFC procedures
and does not acknowledge the substantial extent to which these policies
and procedures necessarily require the exercise of professional judgment.
The dams and reservoirs policy, for example, does not specify the necessary
quantity of baseline data or quantify the acceptable level of impacts on
fish; IFC's environmental staff had to exercise judgment on these matters.
To give another example, the Report acknowledges that the area immediately
affected by the Pangue project did not constitute a wildland within the
meaning of the Wildlands Policy, but interprets the policy to require study
of the possible indirect effects of a project on wildlands beyond its immediate
area of influence. In fact, IFC determined during appra
isal of the project that there would be no direct project effects on wildlands,
and judged that the policy therefore was not relevant to the Pangue project.
In other instances, the Report retroactively applies a higher standard
than was applicable at the time. For example, IFC's environmental review
procedure approved by its Board in December 1992 expressly allowed management
to present a project to the Board for approval even though a major environmental
issue remained unresolved, provided that the resolution of that issue was
a condition of disbursement. However, the Report asserts that IFC violated
applicable requirements by obtaining Board approval on the basis of an
incomplete study of downstream impacts.
Accordingly, IFC disputes the validity of the Hair Report's methodology
in assessing compliance with applicable requirements, and disagrees with
the Report's conclusion that most of the applicable requirements were violated.
IFC believes that its handling of the Pangue project did comply with the
three successively applicable environmental review procedures, as well
as with the involuntary resettlement policy and the wildlands policy.
At the same time, IFC accepts that, in retrospect, the Pangue project did
not fully comply with three of the applicable policies. First, due to oversight,
no survey of cultural properties was carried out, as the Cultural Properties
policy required; however, there has been no indication from the affected
communities that any cultural properties were adversely affected by the
project. Second, the project was not in full compliance with two requirements
of the Indigenous Peoples policy: informed participation by the affected
indigenous peoples, and protection of the security of land tenure of twelve
indigenous families against foreseeable indirect effects resulting from
the project. The Corporation did, however, comply with other requirements
of this policy, including the provision of benefits to the Pehuenche people
and the minimization of construction impacts. Third, the shortcomings in
IFC's handling of downstream impacts, discussed below, and the lack of
an external advisory panel resulted in partial noncomp
liance with the Dams and Reservoirs policy.
3. Minimal Environmental and Social Impact
The Report: "The early IFC staff view that environmental and social
impacts of the Pangue Project would be 'minimal' and could be 'mitigated
to World Bank standards' was not supported by information in the record.
. . . In our opinion this, i.e., the very early decision and public announcement
that the Pangue Project's impacts would be 'minimal' and would be 'acceptable
to the World Bank' has caused real problems throughout the project's subsequent
environmental analysis efforts in that all parties had been informed at
the beginning -- before a thorough environmental review had been done and
before an adequate and comprehensive mitigation plan or program had been
devised -- that all was or would be acceptable to the World Bank Group."
IFC Response: It is essential for IFC to screen projects early and quickly
by applying professional judgment to determine if there are any major financial,
environmental or other issues that cannot be resolved and therefore clearly
prevent the Corporation from moving forward with a project. Such preliminary
screening does not imply that the project will subsequently be approved.
That decision depends upon the results of a thorough appraisal that takes
full account of the environmental assessment. IFC made the judgment at
an early stage that the Pangue project, while sensitive, would have limited
or manageable environmental and social impacts, based upon the following
reservoir area of 500 hectares;
run-of-the-river plant, with daily regulation and storage only; and
8 non-indigenous families to be resettled (53 people).
By most definitions, Pangue is a low impact hydroelectric project. The
World Bank recently reviewed its experience in financing 50 large hydroelectric
projects; in comparison to those 50 projects, Pangue has one of the lowest
environmental and social impacts. For example, Pangue flooded only one
hectare of land per MW of installed capacity and resettled only 53 people.
By comparison, larger dams can flood in excess of a hundred hectares of
land and resettle dozens of people per MW of installed capacity.
IFC's preliminary conclusion about the project impacts did not predetermine
the subsequent IFC management and Board decision to approve an IFC investment
in the project. Nor did it mean that IFC regarded its impacts as minor.
This was the first dam on the river, indigenous communities would potentially
be affected by the project and downstream impacts needed to be fully assessed.
This is why IFC classified the project as a Category A (projects that may
result in diverse and significant environmental impacts thus requiring
a detailed environmental assessment). IFC required a full EIA, and then
required further study of downstream impacts.
4. Analysis of Downstream Impacts
The Report: Downstream impacts of the Pangue project were never satisfactorily
identified, and IFC at key decision points decided to go ahead with the
project even without adequate environmental studies. The Report strongly
criticizes IFC for "playing catch-up" throughout the decision-making
process and asserts that, as a result, the Pangue project has entered into
operation without appropriate avoidance, minimization, mitigation or compensation
of downstream impacts.
IFC response: IFC acknowledges that there were shortcomings in the way
that it handled the issue of downstream impacts, and that it would not
follow the same procedures if it were evaluating the Pangue project today.
IFC proceeded with the project at certain key decision points on the basis
that additional downstream studies would subsequently be conducted. In
fact, these studies led to the mitigation measures which are in place today,
which adequately address downstream impacts.
At the time of Board approval, IFC staff recognized that the downstream
impact analysis carried out to date was not sufficient and that further
study was necessary. Nonetheless, in accordance with then-existing procedures,
IFC management presented the project to the Board, believing that the potential
downstream environmental impacts were known and that a range of mitigation
measures -- to be determined later -- would be available and implemented
to reduce these potential impacts to acceptable levels.
IFC's Board approved the project on the basis that the completion of a
satisfactory downstream impact study would be a condition of first disbursement.
Subsequently, IFC staff concluded that the November 1993 downstream impact
study was satisfactory, although downstream monitoring data remained limited.
IFC staff believed that the November 1993 study contained the key recommendation
-- a Flow Release Management Plan including a minimum ecological flow --
that would provide sufficient safeguards for fish habitat downstream of
the dam and would protect downstream water users at all times of the year.
A downstream monitoring program was put into place, conducted by the Center
of Applied Ecology, of Santiago, Chile, to gather additional information
and to serve as the basis for further mitigation measures.
The monitoring program has in fact resulted in the development of a satisfactory
Plan of Operations that adequately mitigates the potential downstream impacts.
The Plan of Operations was developed in close consultation with a fisheries
specialist on the faculty of the University of Chile. It specifies dam
operating parameters that are designed to protect ecological conditions
downstream of the dam (including preservation of fish habitats), protect
the interests of downstream water users, and assure the safety of persons
using the river downstream.
5. Indigenous Peoples Issues
The Report: The Report states that culturally appropriate "informed
participation" by the Pehuenche people in the development and implementation
of the Pangue project was absent.
IFC response: IFC acknowledges that informed participation of indigenous
peoples has been a weakness in the project and that IFC undersupervised
the social aspects of the project. Subsequently, IFC and Pangue S.A. have
reached agreement on several concrete steps to enhance participation of
the indigenous communities through improvements in the Pehuen Foundation.
The Report: The Report states that the Pehuen Foundation failed to implement
its initial objectives and that its only function is to hand out short-term
material goods to the Pehuenche communities under a welfare-like system.
IFC response: Shortcomings in the participatory process should not completely
overshadow the significance of the Pehuen Foundation as a precedent-setting
mechanism in Chile which enables indigenous people to capture benefits
from a private sector project. While there is no doubt that the Foundation
still faces many challenges in trying to address complex issues of poverty
reduction and sustainable development, the Foundation has made and will
continue to make a positive contribution to improving the lives of the
indigenous people in the project area. The Pehuen Foundation was designed
to promote active participation by the Pehuenche people in its operations.
It has an innovative structure by which each Pehuenche community is represented
on the Board by an elected Pehuenche Director and Secretary, and all projects
are identified and implemented through a community-driven process. The
Foundation has helped communities meet some of their most basic needs and
leverage funds for housing, electricity and other high
priority goods and services. In the future, it will focus to a greater
extent on long-term, capacity building programs.
The Board of Directors of the Pehuen Foundation, with full participation
by the Pehuenche representatives, has recently approved a series of changes
in the operating policies of the Foundation to enhance further the participation
of the community in the Foundation's work. These changes include the adoption
of the indigenous language as a working language of the Foundation, steps
to increase the number of Pehuenche people on the staff of the Foundation,
the development of a community outreach program, the initiation of a radio
program in the local language, and the re-orientation of the project activities
of the Foundation to increase the emphasis on long-term sustainable development
work. In addition, under the terms of an agreement with IFC, Pangue S.A.
has agreed to increase substantially its financial support for the Foundation
so that it can achieve its objectives more effectively.
The Report: "For reasons that were not clear no considerations were
given to the specific impacts of the Pangue project on the twelve Pehuenche
families (belonging to the community of Quepuca-Ralco) who reside on the
land adjacent to what is now the Pangue Reservoir."
IFC response: The twelve Pehuenche families living near the Pangue reservoir
are now at risk of eviction by the registered landowner due to increasing
land values in the area surrounding the reservoir. IFC acknowledges that
their insecure land tenure situation was not given the proper level of
attention at the time of appraisal, even though the issue was mentioned
in existing reports. IFC should have monitored the situation more closely
and insisted on measures which would safeguard these families from future
evictions. However, these families were included from the beginning among
those to be served by the newly-created Pehuen Foundation and have since
benefited from various projects and activities. IFC recognizes the need
to take appropriate steps to safeguard these twelve families.
6. Information supplied to IFC's Board
The Report: "At each stage of the project approval process, key decision-support
documents often did not faithfully or accurately reflect the contents of
underlying environmental studies. These studies were often regarded as
inadequate or incomplete by IFC staff and the extent of these concerns
was not fully conveyed to IFC's Board."
IFC's Response: IFC's written presentations to the Board in 1992 and 1993
did not explicitly criticize the downstream impact studies, but IFC management
does not believe that the Board lacked material information necessary to
make an informed decision or that IFC staff deliberately withheld information.
Before the Board approved the Pangue project in December 1992, there was
a full and open debate about the environmental issues, including the adequacy
of the existing downstream impact study. A number of directors visited
the project site in May 1992. In addition to providing written documentation
to the Board, IFC staff met on numerous occasions with individual Board
members and their staff prior to the Board meeting. At these meetings,
Board members frequently asked questions based on information they had
received from their own governments and from NGOs and discussed with IFC
staff the limitations of the initial downstream impact study and the need
for further work. IFC informed the Board both orally and in
writing that further analysis of downstream impacts would be required as
a condition for disbursement. IFC management also takes issue with the
Report's side-by-side comparisons which purport to show that the 1992 Board
report mischaracterized the November 1992 consultants' study. Management
believes that these comparisons are taken out of context, and that the
Board report relied directly and appropriately on the outside consultants'
study in informing the Board that downstream impacts could be mitigated
to acceptable levels.
At the Board meeting in December 1992 which approved the Pangue project,
IFC staff undertook to report back to the Board when the additional downstream
study was completed. In December 1993, IFC management submitted a report
to the Board which attached the executive summary of the follow-up study
and offered the full text of the study to any Board member who requested
it. A number of Board members received and reviewed the full study. No
Board member called for further discussion of whether IFC should proceed
IFC management does agree with Dr. Hair that the Board was not informed
of the potential indirect impacts of the project on twelve Pehuenche families
living near the Pangue reservoir, who may now be threatened with eviction
by the registered landowner as a result of rising land values. IFC staff
did not include this issue in the Board paper because they believed it
was speculative future possibility. Although IFC staff misjudged the potential
significance of this issue, there is no indication that they sought to
mislead the Board. There is also no evidence to support the Report's conclusion
that the Board would have rejected the project if this information had
been provided to them. IFC recognizes the need to take appropriate steps
to safeguard these twelve families.
IFC AND PANGUE S.A. AGREE TO MAKE IMPROVEMENTS
The GABB complaint helped IFC focus on certain issues arising from IFC's
investment in the Pangue project, and catalyzed further discussions with
the client. The discussions continued even after Pangue S.A.'s unilateral
prepayment of the IFC loans in March 1997.
On April 25, 1997, IFC and Pangue S.A. signed an agreement which details
the steps to be taken to address outstanding environmental and social issues
arising from IFC's investment in the Pangue project. The agreement was
reached following lengthy and candid negotiations between IFC and the Company
held in both Santiago and Washington, D.C.
Pangue S.A. has agreed to examine and provide further information and analysis
on downstream conditions on the Bío-Bío River. Pangue S.A. has also reaffirmed
its commitment to take any further actions consequent to this undertaking,
if needed, to ensure that it is able to comply with the environmental requirements
previously agreed with IFC in connection with the Pangue project.
IFC and Pangue S.A. have also undertaken a review of the current operations
of the Pehuen Foundation, and have considered additional steps which could
be taken to enhance the existing programs. These deliberations were substantially
assisted by IFC's consultation with Pehuenche members of the Foundation's
Board. Specifically, Pangue S.A. has agreed to take a number of steps which
are intended to further enhance the active participation of the Pehuenche
people and their elected representatives in the Foundation's activities,
to increase the Foundation's focus on long term, sustainable development
projects which build capacity, and to promote the electrification of all
the communities which are part of the Foundation. Pangue S.A. has also
pledged to increase its current level of financial support for the Foundation.
Pangue S.A. has reaffirmed its existing commitment to develop and present
to the local governments of Santa Barbara and Quilaco a Master Plan for
development in the vicinity of the Pangue reservoir area. Pangue S.A. has
also reaffirmed its existing commitment to develop and present to the National
Forestry Commission a Watershed Protection and Management Plan.
LOOKING FORWARD: ENVIRONMENTAL CHANGES AT IFC
Based on the review of one IFC project approved in 1992, the Report makes
a number of critical observations about IFC's current environmental and
social processes and far reaching recommendations for changes in the environmental
organization and processes of the World Bank and IFC. To a large extent,
these recommendations parallel the proposals for change made by many NGOs
to the World Bank Group and other multi-laterals. They include a number
of measures already under implementation in the World Bank Group.
IFC has made considerable progress between 1992 and 1997 in improving its
environmental and social performance by substantially increasing the number
of staff in these areas, acquiring substantially greater skills, adopting
new policies and procedures, and enhancing the credibility and transparency
of its operations. IFC recently established an Environmental Review Unit
within IFC's Environment Division and has allocated additional budgetary
resources for its operations.
In its effort to improve its environmental and social performance, IFC
must respect its mandate and remain a reliable business partner while improving
transparency and integration of the concerns of civil society. IFC management
is actively considering the following measures:
Establishment, on a World Bank Group basis, of a stronger system of compliance
monitoring for environmental and social policies.
Expanded use of external advisors or expert panels for sensitive or controversial
Enhancing the credibility of the World Bank Group's responsiveness to the
concerns of affected local people and civil society.
Clarification of World Bank Group environmental and social policies for
private sector operations.
Further integration and sharing of environmental skills within the World
Bank Group through the establishment of a professional environmental and
While the Report authored by Dr. Hair and his colleagues has made a useful
contribution to IFC's understanding of the Pangue project, IFC management
and staff remain convinced that the Corporation has made a valuable contribution
to the Pangue project and that Pangue is a project with limited environmental
and social impacts. There is no disagreement between IFC and Dr. Hair that
the environmental and social review process should have been undertaken
in a more systematic and diligent manner. The efforts the Corporation has
made since the 1990-1992 period have made a positive difference to its
capability and performance in the environmental and social context. IFC
believes that the additional steps under consideration will further reinforce
performance in the future without impeding IFC in its mission to support
private sector development.