Time for the World Bank to clean its energy investments – or lose relevance

5 May 2010/JAKARTA. As the World Bank Group (WBG) asks an $86 billion general capital increase from its major shareholders, it appears this lending and knowledge institution is not committed to direct public resources to measures that support sustainable development, poverty reduction and clean energy. Instead, the Bank looks set to mobilize public money to subsidize fossil fuel industry and orient funds for large-scale thermal, hydropower projects and energy-related policy reforms, says joint NGO report.

This critique emerges from the recent study on the energy portfolio of the Bank in Indonesia undertaken by the Jakarta-based Institute for Essential Services Reform (IESR) and Bank Informartion Center (BIC), an IFI watchdog working in Indonesia, Mekong and South Asia. The study looked at the Bank’s influence on Indonesia’s energy sector over the last 40 years through its lending and non-lending services. The report is released in time for the May 6 Jakarta consultation that WBG organizes to solicit external comments on its energy strategy approach paper.

“Since 1969, the WBG has provided over USD 5.4 billion in energy lending in Indonesia which has focused on centralized, large scale, grid based thermal and hydropower projects and on the financial viability and privatization of the Perusahaan Listrik Negara (PLN)”, says Daniel King, one of the researchers for the study. Bank’s appetite for risky, dirty public debt for energy remains high as demonstrated by pending loans for a $500 million geothermal project in Sumatra and North Sulawesi, $530 million Upper Cisokan hydropower in West Java, and $225 million transmission project in Java and Sumatra.

“If these were an indication that Bank wants to keep its business-as-usual model for energy financing, this leaves us with little confidence that the institution can play a relevant role in promoting low-carbon development and wider energy access for the poor,” argues Fabby Tumiwa, Executive Director of IESR. “Apparently, the Bank only pays lip service as an institution concerned with climate change and delivering affordable and reliable energy to off grid, rural communities. It does not walk the walk”, Tumiwa adds.

Delivering energy access for the poor?

“The Bank’s mandate is to reduce poverty, but it is disappointing that the objective for energy access for the poor is not made clearer in the 2009-2012 Country Partnership Strategy, its country support masterplan. Although the Bank’s rural electrification projects of the 1990s brought electricity access to 10 million households, it still has no clear plan to address energy access for over 70 million Indonesians without electricity access”, King reveals.

The study found that the Bank has oriented its energy financing into investments that are considered high in greenhouse gas emissions, environmentally and socially risky and ones that favor privatization of energy utilities. King discovered that in the 1970s, nearly $600 million worth of loans and grants focused on oil and transmission while loans more than tripled ($1.5 billion) in the 1980s but this time, the Bank dedicated public debt to Indonesia’s coal, large hydropower and transmission projects. In the 1990s, the Bank repeated the same lending pattern. Although it can be credited for investing $670 million for rural electrification projects, it has also scaled up its loans geared to privatize State-owned and operated power utilities.

A climate bank?

While the energy sector is the second largest source of CO2 emissions in Indonesia, discharged from power generation, the Bank’s strategy to mitigate climate change is poor, says the report. As the Government of Indonesia (GOI) aims to reduce GHG emissions by 26 percent by 2020 and make a further cut up to 41 percent with international support, it turns out the Bank has no clear cut strategy to progressively shift its funding from fossil fuel.

“It is predictable – as well as disappointing - that the Bank is not ready to abandon its addiction to dinosaur energy sources and technologies,” claims Tumiwa. “Promoting the use of coal had been a specific policy aim of WBG projects in Indonesia until 1995; coal and gas still form a key part of the Bank’s energy strategy in the country and the lending institution has propensity to label its advanced coal technologies as clean energy. This is inaccurate and misleading”, Tumiwa asserts.

Is the Bank promoting alternatives?

“At the conceptual plane, it looks like this post-World War Bank seeks alternatives but how clean and sustainable these offered solutions are is highly suspect”, argues Berry Nahdian Forqon of WALHI-Indonesia. “Large hydropower is back on the agenda. The Bank is set to approve a $530 million loan in October 2010 to develop the Cisokan River Pumped Storage Power Project, reveals Forqon. The Bank champions hydropower as a “clean energy” source due to its low carbon emissions but scientific studies show that in tropical climate, methane emissions from dam reservoir can be high”, he added.

The Bank has recently increased its funding for geothermal projects using clean technology fund and regular investment loan but the actual social, environmental and economic impacts are yet to be seen. Meanwhile its public and private sector arms have extended the lending envelope to “new renewables” such as wind, solar, small hydro and modern biomass but volume has been negligible.

What’s new in the country energy agenda?

In the study, King found that the Bank is infusing large chunk of public money for policy-based reforms, called development policy loans (DPL), the successor of structural adjustment programs (SAPs) that were controversial in the 1980s and 1990s. From 2007 to 2010, the Bank prepositioned $467 million for DPLs related to financing energy infrastructures, some of which include regulatory, institutional and administrative reforms.

The Bank acknowledges that the infrastructure sector “continues to be plagued with corruption issues in Bank-financed projects, which has delayed project preparation and implementation and has serious implications for the future project pipeline.” Yet, this has not stopped the Bank from providing infrastructure DPLs plagued with lack of transparency and accountability. In the design and execution of DPLs, large amount of money has been provided over a short period of time with little public consultation. This raises another concern on fiduciary control: with little detail available, the public are left in the dark how the public debt is actually spent. The public hardly knows if energy-related DPLs contribute to low carbon development or simply disbursed without addressing the energy needs of the poor.

Time to clean up the act

“With its dirty, risky energy portfolio, it is long overdue for the Bank to progressively shift from unsustainable and climate damaging investments to one that supports developing economies’ transition to low carbon development”, states Norly Mercado of the Bank Information Center. “As the Bank revises its new energy strategy for the next 10 years, the Bank should set out a clear, limited role - only supporting activities that have maximum impact on its goals of sustainable development and poverty reduction.”

“The Bank’s energy strategy must prioritize support for increased energy access for millions of the poor living in rural, off grid areas and those dependent on non-electrical energy sources. After all, energy access is a human right”, states Mercado.

“As countries like Indonesia make the transition necessary to prevent dangerous climate change, the Bank must end investments in fossil fuel extraction and use by 2015 and implement full life-cycle risk adjusted cost accounting by 2015.”

“By failing to clean its energy investments, its role as a climate bank makes no relevance”, concludes Tumiwa.

Contact

Jakarta: Fabby Tumiwa, IESR, fabby@iesr-indonesia.org; +62811949759

Jakarta: Nadia Hadad, BIC, nhadad@bicusa.org; +62811132081

Washington DC: Jelson Garcia, BIC, jgarcia@bicusa.org; +12024276293

Source: BIC

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