The environmental impacts of international finance corporation lending and proposals for reform: a case study of conservation and oil development in the Guatemalan Peten.

• Author: Bowles, Ian A.

1. INTRODUCTION

   The lending practices of the World Bank(1) have been subject to scrutiny and criticism by environmentalists and governments for nearly two decades. In particular, numerous investments in large-scale dams and other infrastructure development projects have been shown to have high environmental costs and questionable development benefits.(2) In response to these criticisms, the World Bank created a series of policy measures designed to reduce the environmental impacts of its lending. The most significant reforms so far have occurred at the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA), the two main public finance arms of the World Bank. However, at the same time that World Bank public sector lending reforms have started to take hold, private capital flows have increased dramatically in recent years.(3) As a result, environmentalists have increased their scrutiny of the loans and lending practices of the International Finance Corporation (IFC), the private sector lending arm of the World Bank. This Article presents a case study of IFC lending in the oil and gas sector in Guatemala that underscores the need for additional environmental reform at IFC.

   This case study involves IFC, a small international oil company called Basic Resources International Limited (Company), and Conservation International (CI), a Washington-based conservation nongovernmental organization (NGO) with offices and a substantial field presence in Guatemala. We begin with a section containing background information on conservation measures undertaken in the northern Peten region of Guatemala, a brief history of oil development in that region prior to 1994, and an overview of current oil operations in the area. We then provide an introduction to IFC and a summary of applicable IFC policies. Next, we present an account of the major events related to the case study at hand: two IFC loans to the Company and the involvement of CI and other parties from 1994 to the present. We conclude with a discussion of lessons learned from this case study and specific proposals for a reform agenda at IFC.

   At its core, this case study concerns loans made by IFC to increase significantly the efficiency and volume of oil extraction in a concession that was grandfathered into a national park. The park in question was and continues to be under sustained pressure from colonization. Over the course of two loans, IFC funds were used to construct a pipeline from the oil field in the park to a refinery outside the park and subsequently to expand production at the oil field. The crux of our findings is that the pipeline should have been constructed to follow the path of the existing road previously used by the oil trucks. Instead, the pipeline crosses significant stretches of primary tropical forest and has opened a new right-of-way into the park without adequate measures to protect the park from new colonization. It is our judgment that a stronger set of IFC lending policies, a better environmental impact assessment, and greater public consultation would have led to a different outcome. IFC should adopt stronger policies to avoid such environmentally damaging investments in the future. As extractive industries and related infrastructure push further into tropical wilderness areas, publicly financed international agencies like IFC have a particular responsibility to ensure that their loans have a net positive impact on environmental protection.

   This case study is complicated by the fact that it includes two separate IFC loans. In the authors' view, there was a progression in the degree of openness and transparency on the part of IFC over the three years spanning the two loans discussed. Many of the improved practices by IFC management and staff in the second loan are a reflection of the new leadership that World Bank President James Wolfensohn has brought to IFC. The initial loan raises numerous and clear issues related to the reform agenda at IFC. The second loan presents a more complex set of issues because 1) IFC also utilized a set of public consultation and environmental impact practices that mark an improvement over those used in the first loan, and 2) the activities funded presented a narrower range of environmental risks. Matters are further complicated by the fact that the Company recently decided to prepay its loans to IFC--a step that effectively precludes IFC from any further involvement in the project, including the ability to monitor and oversee the environmental performance of its loans.

   In the final analysis, the case study presents IFC as an institution in need of reform. Its environmental assessment process and operational policies to protect tropical forests and critical habitats did not lead to a project that contributes meaningfully to protection of a globally important national park. On the contrary, IFC funds were effectively used to open up a new pathway for colonization into a park that already faces considerable threat to its viability. This case study also points to shortcomings in IFC information disclosure policies--policies that allow IFC to protect itself from certain forms of public criticism but do not effectively serve the public interest. We explore these issues and recommendations in greater depth after presenting background information on this case study.

   Conservation and development decisions made in Guatemala and throughout the world are made against an intricate and dynamic socioeconomic and political backdrop. It is essential to acknowledge that the development activities financed by IFC were legal under the laws of Guatemala. Although controversial, the Company complied with applicable laws when constructing and operating its oil facilities. The policies of Guatemala, or any other country, may not be congruent with those of IFC and the larger World Bank Group. Indeed, there is a confusing and contradictory regulatory framework in Guatemala: Nevertheless, it is IFC's responsibility to apply its own natural resources policies and, in any case, support the course of action that results in the least environmentally damaging option.

   This case study raises numerous questions about the role of governments, development agencies, the private sector, conservation organizations, and local communities, but the authors do not attempt to address all pertinent questions in this Article. While acknowledging the larger complexities, the authors have chosen to focus on the narrow issue of IFC's role in such matters, with the goal of improving that institution's environmental performance.

2. BACKGROUND

   This section provides background information on relevant conservation and oil development issues in northern Guatemala. It begins with a discussion of conservation measures undertaken to protect the natural resources of the region. It then provides a brief history of oil development in the region. Finally, it concludes with an introduction to Basic Resources International Limited (Company) and a specific discussion of the Xan oil field and the Company's operations there.

   1. The Maya Biosphere Reserve and Laguna del Tigre National Park

      Spanning nearly 2.1 million hectares of the northern Guatemalan department of Peten and abutting Mexico to the north and west and Belize to the east, the Maya Biosphere Reserve (MBR) is an area of primary lowland tropical forests and expansive wetlands. It contains globally important biological diversity(4) and is host to significant archaeological treasures, such as the Tikal ruins, dating back to the height of Mayan civilization. Created in 1990, the MBR was the cornerstone of a Guatemalan government plan to preserve its country's vast biological wealth and stem the tide of uncontrolled logging, colonization, agriculture, and infrastructure that was spreading into the forests of the Peten.(5) The heart of the reserve is its nearly 800,000 hectares of strictly protected core zones, which include national parks and biotopes (wildlife refuges) reserved solely for conservation.(6) The rest of the reserve is composed of about 841,000 hectares of multiple-use zones--designed to accommodate environmentally sound production of timber, tourism development, and nontimber forest products--and a buffer zone of about 480,000 hectares.(7)

      The biggest core zone within the MBR is also Guatemala's largest national park, the 340,000-hectare Laguna del Tigre National Park and Biotope (Laguna del Tigre),(8) which was established at the same time as the reserve in 1990. The park contains the largest protected freshwater wetland in Central America and has been recognized as a "wetland of international importance" under the 1971 Ramsar Convention on Wetlands of International Importance, ratified by Guatemala in 1990.(9) Laguna del Tigre is also an important wintering ground for North American migratory birds.(10)

   2. Legal Framework for Protected Areas Management in the Peten

      The natural and cultural resources within the Maya Biosphere Reserve are administered and managed by the Guatemalan National Council for Protected Areas (CONAP)(11) according to the mandate established in Congressional Decrees 4-89 and 5-90.(12) CONAP and the National Commission on the Environment (CONAMA) are housed in the President's office and serve as the country's principal environmental agencies.(13) Within the reserve, the Laguna del Tigre, San Miguel La Palotada, and Dos Lagunas biotopes are administered by the Center for Conservation Studies at the University of San Carlos (CECON).(14)

      The Maya Biosphere Reserve is made up of parts of five different Guatemalan municipalities: Melchor de Mencos, Flores, San Jose, San Andres, and La Libertad.(15) The Laguna del Tigre National Park is contained entirely within the Municipality of San Andres. According to Guatemalan municipal codes, a municipality has the right and responsibility to oversee land use and environmental issues and...