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Statement of IFC about the Report by Dr. Jay Hair on the Pangue Hydroelectric Project (July 15, 1997)



 


Statement of IFC about the Report by Dr. Jay Hair on the Pangue Hydroelectric Project
(July 15, 1997)


OVERVIEW


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 plan.
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 indigenous culture.

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 approval.
IFC now provides increased information and guidance to all project sponsors regarding information required and the criteria used to judge a project's acceptability.
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 social science.
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.


THE COMPLAINT


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 REPORT

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.


PUBLIC RELEASE


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 forthcoming.


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 legal liability.


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 Chile:

On environmental issues, IFC:

required the preparation of an environmental impact assessment (EIA) for the project;
required consultations with a wide range of stakeholders concerned about the project;
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 factual information:

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 with disbursement.

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 projects.
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 social network.
CONCLUSION


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.