[WSIS CS-Plenary] No. 10211: Publish What You Pay coalition letter to International Finance Corporation -- Resource Extraction

[Rui Correia]

TITLE: Publish What You Pay coalition letter to International Finance
Corporation
AUTHOR: Henry Parham, PWYP
CATEGORY: Resource Extraction
DATE: 11/9/2005
SOURCE: Publish What You Pay
SOURCE WEBSITE: 

SUMMARY & COMMENT: The International Finance Corporation proposes policy
language changes for revenue and contract transparency. A suggested PWYP
re-enforces that the IFC implement the commitments the World Bank Group made
following the EIR process last year to improve transparency requirements on
extractive sector clients.
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Publish What You Pay coalition letter to International Finance Corporation 

Dear PWYP coalition members,  
In the text below is a letter to the International Finance Corporation with
regards to its proposed policy language for revenue and contract
transparency. With this letter PWYP is looking to re-enforce that the IFC
must put into practice the commitments the World Bank Group made to improved
transparency requirements on extractive sector clients following the EIR
process last year. 

Please send endorsements to Heike Mainhardt-Gibbs at the Bank Information
Center at: hmainhardt at bicusa.org  by midnight on Tuesday 22nd November. 

Please clearly indicate your name name, title, organisation, and country. 

Further information on the IFC’s policy review is available at:
www.ifc.org/disclosurereview   Best regards, 

Henry Parham 
International Coordinator 
Publish What You Pay 
c/o Open Society Foundation - London 
100 Cambridge Grove 
London W6 0LE 
United Kingdom 
Tel: +44 (0) 20 7031 0204 
Mob: +44 (0) 77 6026 8959 
Fax: +44 (0) 20 7031 0201 
E-mail: coordinator at publishwhatyoupay.org   
Website: www.publishwhatyoupay.org Rachel Kyte  
Director 
Environment and Social Development Department 
International Finance Corporation 
2121 Pennsylvania Avenue, NW 
Washington, DC 20433 

************************************************************* 

Re: Draft IFC Sustainability Policy – Revenue and Contract Transparency Dear
Ms. Kyte, 
Transparency of revenue flows and contracts is a critical first step towards
the responsible management of extractive industries and towards realizing
the potential contribution of revenues to poverty reduction. As evidence of
its importance, the recommendations of the World Bank Extractive Industry
Review (EIR) on revenue and contract transparency were among those most
widely and strongly supported across stakeholder groups, including by the
WBG itself as expressed in Management’s Response to the EIR. Therefore, we
were pleased to see that the IFC incorporated the transparency commitment
into its September 22, 2005 draft Social and Environmental Sustainability
Policy (Page 4). 

However, while the draft IFC Sustainability Policy does include language on
revenue and contract transparency, it fails to operationalize the commitment
made by Management by not clearly identifying the types of payments,
contracts, and terms that are required to be disclosed. As the Policy is
currently written, the specific payments and contracts to be disclosed would
need to be negotiated on a project-by-project basis.  
  Furthermore, the draft Policy does not ensure adequate transparency for
all the revenue-generating components of an EI operation. Without clear
minimum disclosure requirements and comprehensive EI operation coverage, the
draft Policy leaves wide gaps for revenue streams to be unaccounted. 

In order to promote more effective revenue and contract transparency in
IFC-supported extractive industry projects, we recommend the following: 1.
Define minimum requirements 

We understand that specific disclosure requirements may be outlined in the
Client’s Action Plan, which the IFC recommends be developed in a
participatory fashion with project stakeholders. Furthermore, we appreciate
that the IFC wants to remain flexible to accommodate for differences across
projects and the use of customized terminology. However, we do not agree
with the IFC that the general types of payments, investment contracts, and
key terms to be disclosed should have to be negotiated on a
project-by-project basis. To do so creates confusion and an uneven playing
field between IFC clients.  

Instead, the IFC should provide in the Performance Standards or Guidance
Notes a list of minimum revenue and contract disclosure requirements,
including the following:  

       All types of material project payments, including, inter alia:
royalty payments, taxes, commodity-based payments, signing bonuses, pipeline
tariffs, dividends, and acreage fees.  
       All types of foreign investment contracts, including, inter alia:
between host governments and companies (e.g. Host Government Agreements,
Production Sharing Agreements, Power Purchasing Agreements, Concession
Agreements) and between governments (e.g. Inter-Governmental Agreements).   

       Furthermore, ensuring the disclosure of all key terms and clauses of
said contracts, including, inter alia: royalty rates, tax rates, tax
exemptions, commodity based payments/purchase requirements, signing bonuses,
pipeline tariff structures, guidelines for the operation of special funds,
social development requirements, revenue distribution requirements, power
purchase requirements, stabilization clauses (e.g. on taxation,
environmental, social, labor rights regulations, etc.), economic equilibrium
clauses, and dispute resolution mechanisms (e.g. international
arbitration).   

2. Require the disclosure of draft Action Plans 

The Action Plan will contain all the specific requirements related to, among
other things, revenue and contract transparency for a specific project.
However, the IFC makes no commitment to disclose Action Plans in draft form
for review and consultation with affected communities. The Action Plan
should be publicly released at least once before finalization to help ensure
that communities affected by IFC projects are able to effectively
participate in defining other project-specific transparency requirements
that are in addition to the minimum requirements outlined in this letter. 

3. Apply transparency to all components of an EI operation  
  
When measuring development effectiveness and asserting the IFC’s
additionality, the IFC argues that its project finance produces wide-ranging
effects across the sector, is critical to upstream and downstream linkages,
and is often the linchpin for financing of other project components. As
such, the IFC Policy should extend transparency requirements to all
components of an EI operation.  For example, revenue and contract
transparency should apply to both the extraction and the transport of
natural resources, not just the specific activity or portion of EI
infrastructure financed by the IFC. 

4. Apply revenue and contract transparency to all EI projects, including
financial intermediaries 

As we clearly stated in our letter of February 2005, “transparency
requirements should not vary with the magnitude of an investment or its
returns; they should be applied to all activities in the extractive sector.”
Currently, the IFC requires contract transparency only for significant
projects, defined as accounting for 10 percent of government revenues. 

Transparency of revenues and contracts must apply to all EI projects
equally, without regard to any threshold size or scope because: 

         Project developmental and fiscal impacts, especially at the
regional level, occur irrespective of the size of a country’s total
revenues.  For example, some projects that have large developmental and
fiscal impacts on a region will fall short of generating 10% of the
country’s total revenues (e.g. Sakhalin region versus the overall Russian
economy).  
         A disclosure trigger based on total government revenues is dubious
at best given that these figures are not always readily available.  
         IFC cannot use contracts to reliably predict revenues that will be
paid to government coffers because these contracts often contain formulas
that change the ultimate revenue flows generated based on changes in oil or
other commodity prices, changes in project costs, and other factors over the
life of the project.  
         Project revenues and a government’s total revenue will both
fluctuate somewhat unpredictably over the life of a project, making any
accurate prediction of the ratio of project revenues to government income
impossible at the time when IFC is performing its due diligence.  
Furthermore, the IFC response to our previous letter states that the
application of draft policies to financial intermediaries will be “briefly
presented in the draft policies and more fully elaborated in our
procedures”. However, the IFC does not make any specific reference to how
revenue and contract transparency would apply to operations of financial
intermediaries. 
   5. Apply to all commercial natural resource extraction 

In its definition of extractive industry projects, the IFC should include
all commercial extraction of natural resources (e.g., timber, water, etc.),
and not limit it to oil, gas, and mining. 

6. Move revenue and contract transparency requirements from the Policy to
Performance Standard 1 

While it is incumbent upon IFC to ensure that disclosure of revenue payments
and contracts is done for each extractive industry project, ultimately this
disclosure is a responsibility of IFC’s clients. 

Furthermore, because these transparency requirements should apply to
projects in the extractive industries whether or not they are receiving IFC
financing, IFC should maximize its efforts to encourage these practices
within the private sector. While IFC’s Sustainability Policy applies
uniquely to itself, the IFC’s Performance Standards may de facto set the
standards for the dozens of private banks and export credit agencies that
have endorsed the Equator Principles. 

Therefore, even though it is sector specific, the requirement for the
disclosure of revenue payments and contracts should be moved to PS 1. 

Thank you for this opportunity to comment on the IFC’s policy proposal for
revenue and contract transparency. We are, however, concerned that many
significant revisions still need to be made to the Sustainability Policy and
Performance Standards, Disclosure Policy and Guidance Notes in order to
effectively capture the specificity of the issues outlined above. We urge
you to carefully consider the recommendations in this letter and hope that
we can continue this dialogue prior to final policy approval.  

Sincerely,